With a struggling economy, Brazil will continue to rely heavily on its state development bank to provide long-term finance for crucial infrastructure projects, unless private-sector alternatives can be found.
Brazil’s state development bank, BNDES, has strongly denied market rumours about its reduced willingness and ability to support the government’s infrastructure-building programme. With the government desperately trying to plug a large and widening primary deficit there are persistent suggestions it may be forced to lower the volume of subsidized TJLP (long-term interest rate – at 7%, less than half the country’s base rate) financing to companies awarded concessions.
However, the planned investment in a series of concessions is the mainstay of the government’s attempts to restore GDP growth – with the latest package of highway, port, airport and railroad projects worth up to $49.5 billion, to be awarded to the private sector in the coming few years. The projects will be awarded on a rolling format with the first concessions set to be announced in early 2016.
“The sector is a priority – and investment won’t fall. There will be a drop in [BNDES’] disbursements in the wider economy but we don’t see this drop in infrastructure financing,” Ligia Chagas Ferreira, head of alternative sources of energy at BNDES told delegates at a conference hosted by Infrastructure Journal (sister publication to Euromoney) in São Paulo in November. “There will be no lack of resources from BNDES – 95% of the bank’s income comes from returns from operation and not the treasury.” The government doesn’t control the IRR – we don’t regulate that aspect Ian Ramalho Guerriero, planning ministry.
International interest in building and financing Brazil’s infrastructure backlog is reported to be strong, although converting interest into action will be complicated. Anecdotal evidence from investors and financiers suggests deals may progress and the New York Times reported in early November that Macquarie had raised over R$600 million for a Brazil infrastructure fund. That fund, and others like it, will initially look at the $16.5 billion worth of 16 highway projects, with a total of 7,068 kilometres of road building; $21.5 billion of railroads (1,088klm), as well as $9.3 billion of new port construction and $2.2 billion of airports.
The subsidized lending rates from BNDES, coupled with the debilitating effect that the Lavo Jato fraud investigations have had on the local competition, has created a potential window of opportunity for international investors. And it’s one the Brazilian government is keen to foster. “Obviously at the moment we have macro-economic instability but it is a good time to diagnose the problems we have in attracting foreign investment so we can overcome the difficulties and ease the bottlenecks,” says Edmilson Gama Da Silva, deputy director at the Ministry of Planning, Budget and Management.
Recent reforms have included incentivizing the use of local debenture debt-financing, as well as practical support for projects with the new streamlined land appropriation rules (quicker process and capped costs). There are also new environmental rules to enable projects to be split into sections and work to begin on the least environmentally-contentious areas. There are further plans to centralize all project related issues into one department (some issues span multiple ministries) with a single, digital point of entry.
The government has also made investor-friendly statements about allowing a greater rate of return on projects, although Ian Ramalho Guerriero, minister for the accelerated growth programme at the planning ministry, says the government never directly controlled this.
“Concessions are awarded by the lowest bid for tariffs,” he says. “The internal rate of return that generates for construction companies is dependent on the assumptions it uses within its business case and how efficiently it can bring cost-effective solutions. The government doesn’t control the IRR – we don’t regulate that aspect.”
The private sector clearly welcomes the innovations but there are perennial sticking points: most notably FX risks and unquantifiable regulatory risks. Currency hedging options are prohibitively expensive for the long-term financing nature of infrastructure projects, which, at a stroke, takes away a huge potential segment of the potential of the market. As currency hedging is ultimately a function of the very high interest rate environment in Brazil (the Selic rate is 14.25%) there is no simple solution to the FX issue.
“The fundamentals are extremely good in Brazil but the missing link is economic growth – and the elephant in the room is the problem for non-reais financing,” says Andrew Eckhardt, director of Green Giraffe, a renewable energy financing company that began looking at opportunities in Brazil in September. “Brazil is interesting from an equity perspective and a lot of international investors think that this is a great time to invest but this is the more speculative type of investor. On the debt side, even if you come with 8% dollar financing you aren’t as cheap as BNDES and you would need to create a project with a natural dollar flow [because hedging is too expensive].”
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