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Brazil: Cool reception for public-private alliance

Assertion that private funding is vital challenged but private skills might be essential.

The Brazilian government and development bank BNDES’s joint effort to boost infrastructure projects as a way to increase investment, grow GDP and remove bottlenecks in the economy is receiving a cautious welcome from the private sector. The president of BNDES, Luciano Coutinho, says infrastructure and logistics are now the priority for bank investment, but he is hopeful that private-sector companies and finance will forge a successful partnership with the public sector.

Coutinho’s assertion that private-sector investment is vital is challenged by Itaú BBA’s head of project finance, Alberto Zoffmann. “According to [an Itaú BBA] study, as of December 2012 BNDES had space on its balance sheet for $260 billion more in loans, considering Basle rules,” he says. “If we assume the US dollar-denominated oil and gas sector is funded by US and international banks, then BNDES has the capacity to make more long-term financing. We expect it will support the more strategic investments such as key energy projects, roads, rail and airport, leaving room for private-sector investment in the ports, mining and other non-key investments in energy.”

Alberto Zoffmann, head of project finance, Itaú BBA

Zoffmann adds, though, that the private sector is already deeply involved in infrastructure finance. “We did a study that shows that while BNDES funds 80% of infrastructure finance in Brazil, through the use of pass-through funding and other associated risk transfers – such as corporate guarantees – the bank only runs about 43% of the risk associated with these projects,” he says. Luiz Gustavo Fraxino, founding partner at Brazilian law firm Conselvan, Fraxino & Associates, argues that the government is hoping to make greater use of the 2004 public-private partnership law, introduced under president Lula, because it doesn’t have the capacity to tackle the big infrastructure challenges facing the country.

“The Brazilian state is bloated, and has no more capacity to meet with quality in all areas in which it is designated, and so a need arises for input from other actors on the social-economic development process,” says Gustavo Fraxino. “The recent privatizations and capex programmes announced recently come to show that the state is looking for partnerships to facilitate large projects that would hardly leave the paper if the private sector did not contribute in some way, with resources, technology and innovation. And there is more: in addition to the exchange of know-how between the actors, there is also an exchange of experience and joint sharing of project risks, which is interesting for both sides.”


The first part of the government’s R$133 billion ($66 billion) package of concessions to come to market will be nine new toll roads. “The companies that are interested in bidding are very worried about the construction risk because they will need to construct these roads within five years or face financial penalties,” says Zoffmann. “The building of these new toll roads is a challenge, especially if they want to award all nine road contracts at the same time.”

Initially two roads concessions were going to be awarded in early 2013, but the announcement of the winning bidders has been delayed and there is a possibility all nine will be decided at the same time, although BNDES’s Coutinho hints that the government has been listening to the private sector’s concerns. On a conference call with news reporters in late April, Coutinho said it would be “challenging” to run all projects simultaneously, and suggested that concessions could be awarded in “two or three tranches to facilitate the smooth functioning of the projects”.

“We expect a lot of competition for these contracts,” says Zoffmann. “The government is giving money to support a highly leveraged structure, and that is interesting. Some companies are looking to implement equity structures, which means, from the financial perspective, the projects are very juicy, but the construction risk is the key concern.”

Domestic consortiums of construction companies and banks are expected to dominate the toll road auctions. International investors are expected to have more opportunity in the airport sector, mainly because the foreign operator needs to have 25% of the consortium and that will bring in more foreign banks and investors to participate in this sector. However, BNDES will remain as the main player in the debt financing. Local banks that know BNDES and how it operates are confident that they will have a strategic advantage.


The Brazilian government’s recent intervention in utilities sent share prices in the sector falling as investors realized that political risk was a real challenge to future earnings. Ironically, this sector could now be one of the greatest opportunities for foreign investors. Zoffmann says that the government’s actions only applied to existing concessions and the market shouldn’t automatically project those concerns onto upcoming energy projects.

“External investors are very worried about what happened in the energy segment in Brazil,” says Zoffmann. “However, the changes applied to existing concessions, and the market is much more worried about how they did what they did, rather than what they did, in our opinion. It was largely a communication issue. The government didn’t break any rules or contracts. From a debt perspective, no one lost money, and that point needs to be clear, whereas equity investors are very worried and they lost a lot of money.”

He argues that for new projects – which is where he focuses – the energy market is attractive because climate problems will lead probably to a higher energy price in the coming concessions than in the last round.

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