Brazil: Wanted: infrastructure bonds for long-term finance

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By:
Rob Dwyer
Published on:

Government loans to BNDES to be restricted; Tax breaks for long-tenor investors

In a coordinated series of announcements the Brazilian government has attempted to promote long-term private-sector financing. In the month before Dilma Rousseff assumed the presidency on January 1, her financial team sent clear signals that her administration aimed to have the private sector take a greater role in infrastructure projects.

At the end of November, finance minister Guido Mantega revealed that in 2011 the government would halve the loans it provides to state development bank BNDES, worth about $61 billion in 2010, whose loan advances at subsidized interest rates have been said to be blocking long-tenor private finance.

"Brazil now has projects that require financing for 20, 25, 30 years. It was necessary to take measures to make this long-term credit viable"

Guido Mantega

On December 15, Mantega also announced a range of measures to encourage private-sector development. "Big projects have come back," he said. "Brazil now has projects that require financing for 20, 25, 30 years. It was necessary to take measures to make this long-term credit viable."

The income tax on earnings from infrastructure bonds will be reduced or eliminated and the income tax on foreign investors buying corporate bonds with a tenor of more than four years will be scrapped – putting investors in corporate debt on the same tax footing as investors in sovereign bonds. Brazilian banks will be allowed to spend some of their reserve requirements on corporate bonds in the secondary market, and the taxes on earnings from the secondary market will be reduced.

The government is to allow BNDES to raise its own funding in the market for non-core projects and the development bank will also be required to set aside R$10 billion ($6 billion) to purchase longer-term infrastructure-related debt. BNDES bought 10% of the first project finance bond, the R$1.34 billion Rota das Bandeiras transaction, and Nelson Siffert, deputy managing director of infrastructure at BNDES, expects the bank to have a similar level of participation in future infrastructure finance issuance. The government will also create a privately managed fund using about $2 billion to provide liquidity to the secondary market for the domestic bonds.

The aims of the measures are to reduce BNDES’s impact on long-term financing for infrastructure projects and to develop a secondary market for infrastructure-linked corporate bonds and project bonds. The government hopes that these measures will increase local debt issuance by R$70 billion a year.