Brazil: laying the groundwork for a sustained recovery
Recent years have been challenging to Brazil, particularly when it comes to investments in infrastructure. The political uncertainty continues to delay economic recovery. The depressed GDP fails to put pressure on infrastructure, and at the same time the lack of infrastructure contributes to the stagnation.
Nonetheless, there is good news. The current government has set in motion a series of measures to create conditions for a more sustained recovery in the coming years – the creation of the PPI (Program for Partnership in Investments), a multi-ministerial task force aimed at improving the quality of projects and the conditions of concessions - being the first of such measures.
In the same context, a series of efforts have been made to solve issues of projects that were failing in the context of the prolonged economic downturn, with the enactment of laws that allowed for the reprofiling or rebid of existing concessions. Measures have also been taken for the divestment of state-controlled infrastructure assets (notably in the power and oil and gas sectors). Plans and efforts to launch concessions for airports, toll-roads, ports, railways, oil & gas fields, and electric transmission and generation were also put forth, some of them successfully, despite the challenging conditions.
These efforts have been made in tandem with measures by the government’s economic team (Ministry of Economy, Central Bank, Ministry of Planning) to control government spending and ensure economic stability with low inflation.
Sale of important assets by Petrobras (including transportation pipelines and fertiliser plants) and Eletrobras (including distribution companies), and competition for transmission concessions (with bids approaching 70% discount on ceiling tariffs and nearly ten players bidding for a single lot in the last auction in June) provide evidence that there is private sector appetite for long term investment in Brazil, even in difficult times.
BNDES replaced its subsidised long term TJLP (long-term interest rate) for the market-friendly index TLP (long-term rate). The TLP was long-expected by the market and came to replace the TJLP. Historically, the TJLP was several percentage points lower than the Brazilian Central Bank’s basic rate (SELIC), and consequently was much lower than private banks’ market interest rates, turning it into a heavily subsidised rate. The TLP will converge in five years to the rate of a Brazilian sovereign note (NTN-B), based on the country’s official inflation rate IPCA.
This rate replacement is an important part of an overall effort to reduce the dependence of infrastructure projects on BNDES loans, and thus increase the participation of private players in infrastructure financing.
In fact, examples of recent projects financed in Brazil demonstrate that, in the context where subsidised financing from official banks is no longer available, sponsors and lenders have the opportunity to be creative and resurrect previous market practice and true project financing techniques, which were common in Brazil some 15–20 years ago, but had succumbed to the unbeatable subsidies.
In this context, capital markets instruments have experienced a surge - in 2018 over R$10 billion (until July) have been financed through project bonds (debentures de infraestrutura), an all-time record since the creation of the instrument. Examples of financing using solely infrastructure debentures with a relatively small spread over inflation and no recourse to sponsors are starting to be seen in the market, something that would have been unthinkable for long-term debt financing in the Brazilian private sector a couple of years ago. Other structures combining long-term debt from multilateral institutions and locally issued project bonds placed in the international market and insured by export credit agencies have also been put in place.
It is expected that the upcoming presidential elections in October will end the uncertainty as to whether macroeconomic reform agendas – notably aimed at budget balance (such as pension reform) – will be pursued. The election of a market friendly government could result in a surge of infrastructure investments over the near-term. The recent experiences demonstrate that, with skilful planning, opportunities will arise for the private sector to play a major role in the financing of infrastructure projects.