Brazil Economy: Discussing Privatization Programs with Deputy Minister Diogo Mac Cord de Faria

Interview with Diogo Mac Cord de Faria, Deputy Minister for Privatizations at the Ministry of Economy (Brazil)

What is your role within the Ministry of Economy?

I am the Deputy Minister for Privatizations within the Ministry of Economy in Brazil. I oversee the state-funded companies in Brazil and the real estate portfolio. That is about $400 billion. Currently, we have some large privatization processes underway such as Eletrobras, which is the largest utility company in Latin America. We are also privatizing our Post Office, Correios, and it is also the largest Post Office in Latin America. We are sponsoring a huge program which is the creation of real estate trust funds in which we will integrate assets in large areas within urban centers from north to south – cities like Rio de Janeiro, Sao Paulo, Florianopolis, Porto Alegre and Belo Horizonte. It is a specific real estate fund and is a new strategy that we are sponsoring, but we have many other projects for privatization. When we talk about urban mobility, we are privatizing the urban trains of Belo Horizonte and Porto Alegre. We have many different projects all over the county.

What is it about these projects that would be of interest to international investors?

Brazil has a very solid history of public-private partnerships and we started doing it in the 1990s. To give an example, our power market is heavily sponsored by the private sector. The last federally sponsored company that we have is Eletrobras. That is an opportunity for international investors to be part of the largest privatization process in the history of Latin America. It is a company that is not only very important for the Brazilian market but can also be a vector of expansion in all of South America. And the same thing happens with real estate. The federal government has the best assets. We are talking about greenfield areas of 1.5 million square meters within dense cities such as Rio de Janeiro, so imagine what you can do with that. It is a huge opportunity for forward-looking investors. It is a market that has to be developed in Brazil. If we have these kinds of developers abroad who want to be part of this transformation, that is the moment.

Can you give examples of some real estate funds that would get international attention?

There is an area in Florianopolis, which is a very beautiful city in the south of Brazil that is the capital of the state of Santa Catarina. 70% of Brazil’s economy is concentrated in the south and southeast. In the south we have large communities of Germans, Italians, Polish and Japanese. Florianopolis is known in Brazil as being an important city for tech development. We have 1.3 million square meters of oceanfront, so imagine the opportunity to develop an entire neighborhood from scratch that could be seen as the best place for rich people to buy an apartment, or to work or whatever. We are hiring a private manager to oversee the project. This manager will have full autonomy to create a group of developers, architects, urbanists and so on and they will be able to create a master plan from the beginning to create an investment thesis to attract capital in order to develop the project. They will make money by a performance fee that they will receive on everything that is more than the benchmark that we are setting, which is our long-term cost of public debt. This performance fee will be 20% of what exceeds the benchmark, but it could be up to 30% if the private manager meets some ESG (environmental, social and corporate governance) certifications. Our idea is to sponsor a large program of new ESG neighborhoods, entire sustainable neighborhoods. Changes to the city landscape is what we are looking for.

Have you tried this anywhere yet?

This is the first time that the federal government has put something like this in place. We do have some groups in Brazil that used to do something like this by themselves, but that is not normal because we do not have that many areas of 1.3 million square meters of oceanfront in important cities. Only the federal government holds some assets like this and of this quality and that is why we are inviting international companies to partner with local companies and local private managers to develop these new projects. According to Brazilian law, only managers who are registered to work in Brazil can be official managers of these funds, however, they have full autonomy to partner with anyone abroad.

Is it too early to invite international partners before private managers are put in place?

Yes and no. We will publish the first tenders by the end of April, meaning we will hire private managers by late May, or early June, and they will have one year to present a master plan and investment thesis. If a manager does not have a group in place to create a project, they may not have enough time to prepare a master plan within the next year, so I think this is the moment to do it.

What kind of person do you have in mind to be a manager?

We have the CVM (Comissão de Valores Mobiliários), which is the regulator of capital markets in Brazil, and what we are asking for is private managers with assets under management over $100 million. They have to be registered with the CVM and their assets under management has to be for development funds because we have two kinds of real estate funds in Brazil. We call them bricks and paper. Papers are mostly debts, so the funds administer debts and of course that is not what we are looking for. We are looking for managers with over $100 million in assets under management for bricks for development.

Will these managers be real estate developers?

Some of them will have a DNA of developing new projects but most of them will not, so that is why they will have to partner with some developers. That said, I think we have very few developers with this vision in Brazil. That is why I believe international developers who have done similar projects abroad will have an opportunity to come here to partner with local managers to deliver the ESG neighborhoods that we envision.

What is your expectation for the privatization of Eletrobras?

The interest is huge because it is by far the biggest opportunity to invest in Latin America. Large international funds have a very high minimal ticket and they do not waste their time overseeing small projects and this is a huge operation. We are already working with large pension funds and large banks, which is why I believe this operation with be a huge success. Another reason why I think it will be successful is because of the know-how that Eletrobras has. Because of the Russia-Ukraine war, we are talking about the future of the energy sector and how we can be resilient. More than 80% of Brazil’s energy is generated by renewables and Eletrobras has a lot of experience with hydroelectric power plants, which is the heart of our power grid. Latin America still has many opportunities to develop large hydro power plants such as in Peru, Colombia and so on. The engineers that Eletrobras have are by far the best group of technical people in Latin America that could immediately start developing this kind of project in other countries. The company could be used as a vector of expansion, not only in South America, but in all of Latin America as well.

As for the privatization of Correios, what do you think will interest international funds?

It is very similar to Eletrobras as a vector of expansion. When you consider DHL, which used to be a state-owned company in Germany, it was privatized and is now the largest logistics company in the world. Correios has the potential to be the same in Latin America. It used to be a company that delivered letters but we are no longer writing a lot of letters so that is a sector that is falling apart. But at the same time, packages are skyrocketing because of e-commerce and Correios has the best spots in Brazil for logistics. It has 9,000 different delivery points and huge distribution centers and those are the best assets for someone looking to develop the package delivery opportunity. Correios’ revenues are going up and up in a sector that is losing market share and with private money, there will be an opportunity to invest much more. We are targeting investment of four to six times more than what Correios invests nowadays. We already have an established platform that with private administration could be much more effective and much more efficient.

What else is important to you?

I like the urban mobility projects because I think that is the bridge between our privatization program and the real estate agenda. When you think about the urban train of Belo Horizonte, about 200,000 people use the system every day, so it is very transformative for that area. After privatization, we can reach 300,000 people per day and with that many people using the train every day, the real opportunity is not the ridership, it is the real estate that can be developed. I think many countries all over the world are making a lot of money with a real estate agenda within urban transportation systems, so I think that is an invitation to explore these opportunities in Brazil as well.

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