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SPECIAL INTERVIEW PEDRO GONÇALVES

2014-02-18

SPECIAL INTERVIEW PEDRO GONÇALVES

Diário Económico / Antena 1
17-02-2014

Pedro Gonçalves is a manager with a career in the construction industry.
In 2011, he left Soares da Costa leadership and, months later, he launched the Vallis Fund which took control of a number of builders struggling against the effects of the crisis .Today, the crisis has not yet ended and Pedro Gonçalves admits new acquisitions.

The manager defends internationalization as the only route for building companies. On strategic public works, he regrets the lack of investment in rail and has doubts about the PPP (Private-Public Partnerships) models in the future.

How do you do it to have virtually bankrupt companies paying debts and making a profit?
Truthfully, some of the companies were not in a situation that we would call pre-bankruptcy, but they were going on that direction, others not so much. And in the fund (Vallis), the rationale behind this project is related to the lack of critical mass that we have identified in the construction sector companies in order to embrace the only possible road to recovery: internationalization. Much of the problems in the construction sector in Portugal are due to excessive pulverization. All the movements that existed to group companies were consciously or unconsciously resisted by the industry actors, just like the saying: "I’d rather be a queen for a day than a princess my entire life." And in 2011, when many of these companies, are hit hard by the crisis, they had no muscle, had no management, and lacked critical mass to be able to make this shift in their business angle.

You bought cheaper as well. In the crisis ...
Regardless of the purchase amount, there was especially the investors’ motivation. There may have been a few cases where the circumstances pushed them, but there were cases where this was not the reason. Shareholders looked and said, "alone we do not manage to tread the path that is ahead." 

Was it also the banking issue? There are four banks involved in the fund.
The banking endured from two points of view. Firstly, they financed the fund, creating the conditions for the fund to acquire companies. They created the conditions for a debt restructuring according to a business plan that we have mapped. Secondly, they created support mechanisms, such as bank guarantees, to the immediate restructuring. In 2013, the Elevo Group paid some tens of millions of Euros either in interest or in repayment already. It was a significant effort. In 2011 we admitted that we had reached the lowest point of the sector, but the truth is that it had not happened. The adjustment process of the construction sector still continued throughout 2013 and I believe that only in 2014 will we find a frame of reference of what the next few years will be.

What is this frame of reference? 
It is a frame of the volume of production in the sector which I believe may still have a float in the downward direction but will no longer be as significant as in previous years. In the public sector no signs of recovery of investment are noticed. In the tourism real estate sector there started to be seen some signs of recovery projects that were in the drawer. We have achieved the volume of output in the construction sector for the next few years. Of course we are talking about a volume well below the point where we were four years ago. 

Has the market shrunk by half? 
Less than half.

Should the government open some doors for domestic firms in foreign markets?
Those who do business are the enterprises, not the states neither the governments. If companies do not do their job in identifying business opportunities, in creating relationships in the countries, there may be many state visits, many business missions, but that does not mean that companies will succeed in business. The role of government begins with homework done within their own country. We heard of a review of taxation in the IRC and Social Security for employees under expatriation or working abroad, which was something that was never made.
Successive governments have been relatively blind to the tools to help business competitiveness.

Is this happening in construction?
There is not a strategic direction for construction. There are countries which the Portuguese State has privileged in economic diplomacy. Some of these countries represent opportunities for the construction sector, such as Venezuela.

Does the fund concede more acquisitions? 
The minimum critical mass to build the consolidation project exists. Our aim was not the volume of assets under management, the size; our aim was to hold a balanced industrial base to be able to build a new construction group with all the valences and very multidisciplinary. We achieved this with these four companies (Edifer, Monte Adriano, Hagen and Eusébios). 
We do not close the door to any opportunities that may arise which bring the skills or strengthen our presence in certain geographies that we consider interesting. But the most proactive phase was that which allowed us to create this base. We are talking about a group that will charge more than 500 million this year, which was the minimum to succeed. 

Are you attentive to buying abroad? 
No. We are always talking about companies with headquarters and origin in Portugal.

The Vallis Fund internationalization has been focused on Angola and Mozambique. Do these markets still hold a potential or is there the need to open other markets?
Both questions deserve a positive response. Either of the two markets has huge potential. Angola has various kinds of wealth, immediately the natural ones. It has gone through a cycle of basic infrastructure but there is much to be done in energy networks, sanitation, and water. There is still much to do in the field of housing and the development of the provinces. Mozambique is starting this process, certainly with different characteristics from Angola. The availability of features that will occur with the onset of the operation of a set of resources, such as gas, will allow this development. However, companies, namely in the construction sector, should not make the mistake of replacing the problems of dependence on the domestic market by dependence on a single international market. Today, in our case and perhaps in others, Angola has a large weight in the turnover ...

How much is it worth? 50%?
It is worth between 30% and 45%. In a group with our profile, what is desirable is that a particular market does not exceed 20%, 25% of our portfolio.

What are the alternatives?
Africa as a whole. For Portuguese companies, the experience of working in African Portuguese-speaking countries gives us a continent reality, even though each country has its characteristics. We are now starting projects in Gabon, we will also be in Senegal very soon, we are prospecting in Zambia. During this year, we will start work on establishing a business in Equatorial Guinea. All African geographies where we try to carry, safeguarding the specific characteristics of each country, these features of the African reality, particularly in terms of logistics and industry. We know the problems we had in the years when Angola did not have the logistics chain it has today. Therefore we can adapt ourselves in these countries to what we have to do. In some cases there is also geographical proximity. We are doing development in the countries of the West African coast from our industrial base of Cape Verde.

Recently, the study that proposes the strategic construction for Portugal until 2020 has been released. Do the priorities look right to you? And do you feel that will be a reason for builders to bet back on the national market?
Starting with the second question, in my group, if I have any temptation to defend it, I hope there is someone to stop me. I do not believe that will happen, at least at the level of the major players in the area. In our group, we will not change a comma in the plan we have set for the next five years.

Have you learned the lesson from the crisis in the country?
I learned my lesson and I hope many others too. I have heard much of the theme of emigration and it is easy to talk in the abstract. Every week I am in one of our international operations, so I am with the expatriates, I share their personal anxieties and difficulties created in family relationships. Therefore, I have shared feelings concerning this theme, in business terms, the path is the external markets, but I am perfectly aware of the severe impact on family relationships and even on some social disintegration in the country.

But isn’t there any interest of national companies in opportunities that may arise in the Portuguese market?
There will surely be. But it cannot represent an uncontrolled enthusiasm as it happened at other times. I do not believe that the phenomenon of companies in the construction sector entering into business areas to which they had no power, nor vocation, solely on behalf of the synergy with the construction area, will take place again. If you look at Spain, something similar is happening: many builders have extended their area of business and today they are re-focusing on the construction industry.

And does the study set the right priorities?
There is clearly a change in orientation compared to that we saw in previous years. Looking at the projects listed as priorities, especially the first 15, they are focused on the port or maritime strand and exporting logic. And on the railroad also. Something on the railroad, but also linked to maritime logic. I do not know if there is some excessive enthusiasm about the exporter cycle we are living. I see the devaluation of the highway as positive. We are aware that the investment made on the highway was more than necessary. I am sorry that, despite there being some investments in the railway sector, it is still the poor relative. Portugal has already been, in previous centuries, in the forefront of rail. Today - apart from the urban areas - it is almost lost, whether in goods, whether on passengers.

Is the State still a bad credit?
The cycle of the country in the last three years, the measures that have been taken, have created some conviction that such situations do not recur.

Are we returning to the concrete fashion? Much of the funding will be from EU funds. Can’t we allocate that money to another area?
The term itself is an example of excessive politicisation. This is not a government plan, it is a working document and it should serve for an extended discussion. However, it is turning into more of a gunshot. Regardless of the work having been promoted by the government, it involved entities that have nothing to do with the public area and who are living forces in the Portuguese society, so it was good that consensus were sought . There is no problem if we turn to concrete. We have infrastructure whose usefulness no one questions, they are a development factor today. Unfortunately, we have others that are expendable. As for the funding, the problem is the same. It is not misused in the concrete only.

Do you feel the private sector availability to finance the strategic works, namely through the PPPs?
I do not know if the model will be PPP. Even if it is, you will have to find another name because as soon as it comes to PPP no one will want to look at them. There will be limited availability for models that are supported by rent payments by the State. Distrust is here. There is not a distrust of the state's ability to pay, but whether there will be a sustained period without changing the rules of the game. There will be many questions on projects based on a renting logic. Now, I believe that there will be projects that are profitable, even if it is in a long term, and that will generate their own revenues. Although, again, we have to create a framework for businesses: tax, the administration of justice and political. We need to feel that there is a boundary line that is not crossed in the political game that will put into question the legitimate expectations of those who invested, whether they are foreign or Portuguese.

Have the construction companies, banking and the State learned from the mistakes made in the last PPP wave?
From the private sector end, the promoters - builders or not - and banking, I believe so. Governments have a four-year cycle and hence the reference that was the importance of creating a common and aligned thinking. Looking at the claims and practice of this office, even within a framework of compliance with the Troika Memorandum, everything points to a paradigm shift.
It is important that there is a similar understanding in the arc of power.

Do you feel that the banking is willing to enter into new PPP charging rates that allow the project profitability or will it stipulate a risk premium in view of what happened in the past?
Each case is unique. The key issue for banks is: look at the business model and realize if they will get their money.

And how are the renegotiation processes of previous PPP?
Our most direct involvement, the one in which we have more share in the consortium, are the two projects that came through EDIFER – Baixo Alentejo and the Algarve coastline. They are also those in which the building was behind schedule. So there was the possibility of redefining its scope. In addition, there wasn’t the pressure they were already in the cycle in which the state had to pay for the rent. There was a memorandum of understanding already signed some time ago and that defines the scope, we are finalizing the terms and I can say that we have the banks very aligned. We, then, have shares of lower expression in grants that are led by Ascendi. Here the degree of monitoring is lower because they are minority participations.



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