Brazil seeks foreign help for infrastructure
Guarantees to aid private sector flows; BNDES scaling back but still dominant player.
The Brazilian government is in negotiations with the IFC and other multilateral lenders to create a system of guarantees that will encourage private sector capital to finance the country’s large infrastructure needs.
Brazil is a country that doesn't have enough internal savings. You could make the case for a need for some sort of incentive for international finance
Hector Gomez Ang,
The government acknowledges the need for public sector reforms if it is to attract international investors to finance infrastructure investment, according to Paulo Correa, secretary for economic affairs at Brazil’s ministry of finance.
Correa, speaking at the IIF conference in Lima, told delegates that the end of the commodity boom has reduced the country’s fiscal space to finance infrastructure from the public sector, saying: “We are all looking in different ways to build the bridge between the tremendous [capital] liquidity in the international market and Brazil’s infrastructure needs.”
Gabriel Goldschmidt, IFC’s head of infrastructure for Latin America and the Caribbean, thinks that the provision of guarantees to mitigate construction risks for private investors could be particularly effective.
“There could be space for guarantees – that’s an area in which a number of actors, including ourselves, are trying to make something happen,” he says.
“Clearly, if you could have a wrap that isolates construction risk from the remaining residual risks you could have a set of investors that is significantly larger than the one you have now. There are a number of mitigants to construction risk that we are looking into but this clearly goes beyond what one multi-lateral organization can do, so if this product is developed there should be a market standard.”
Hector Gomez Ang, IFC’s country manager for Brazil, says the multilateral development bank is looking to facilitate greater commercial finance for Brazil’s infrastructure needs, but stresses the reduction in the role of the Brazilian Development Bank (BNDES) needs to be placed in context.
“BNDES is retreating but it has made it very clear that infrastructure will continue to be its priority, so while it will probably withdraw from some sectors it will continue to be a very real player in infrastructure,” he says.
“However, some of the things the bank is doing will help private-sector involvement. For example, if private companies want to maximize their access to subsidized lending [TLJP] they need to issue project bonds and this is a good way to provide incentives for the capital markets to develop.”
The buyers of the project debentures issued in Brazil to date have been almost exclusively local and Gomez Ang says there is a growing realization that international capital is needed if the country is to develop its much-maligned infrastructure, both to boost GDP through construction and improve broader industrial productivity.
One of the potential solutions is to replicate the Colombian government’s provision of dollar-denominated payments for its 4G road programme, which has facilitated international banks getting involved in financing some of the road projects.
“We are currently having a discussion with the Brazilian government and sponsors about this [provision of dollar denominated financing], but I wouldn’t bet on that being available soon,” says Gomez Ang.
“The first phase of financing will still likely be local, with the international finance coming at the second stage. But Brazil is a country that doesn’t have enough internal savings, so to finance [all the infrastructure projects it requires] it will need to tap international capital, and you could make the case for a need for some sort of incentive for international finance.”
Goldschmidt says the ability of Latin American governments to commit to providing dollar-denominated financing up to 18 years into the future (as is the case with Colombia’s 4G projects) is limited.
However, he says international investors can be encouraged in ways that do not put a direct burden on public finances.
He points to a deal for a Peruvian toll road that linked 50% of the tariff increases to the local currency’s exchange rate to the dollar – with the other 50% to Peruvian CPI, as a way to provide some comfort to international investors.
The Brazilian government says it is willing to allow higher internal rates of return on upcoming concessions, which will encourage private sponsors and their financing partners. However, according to Correa, the key to attracting international investors will be through regulatory reform.
“To a large extent the inflows will come through strengthening the regulatory framework, and by reducing the regulatory risk through better planning, better projects and enabling information flow between the public and private sectors,” he says.
“This is an agenda that is evolving and becoming stronger. In Brazil we are committed to working with the international community to create a dialogue that will lead to Brazilian infrastructure being a global asset class. This is very ambitious but we want to be part of [the international infrastructure] growth.”
Goldschmidt agrees with Correa and says that the IFC is working with the Brazilian government on other issues, such as structuring bottlenecks and communicating the relatively high level of regulatory and legal stability in the country.
Despite its problems, he says Brazil remains attractive for international investors.
“There is a lot of appetite for Brazilian investments,” he says. “Brazil continues to attract the biggest chunk of Latin America’s investments and investors are not irrational. As well as being a very large economy, it is a country that has rule of law – its institutions are working. That doesn’t mean that concession contracts haven’t ever been changed but in the big picture Brazil is pretty stable.”