Brazil says markets, not politics, will drive infrastructure investments

Brazil says markets, not politics, will drive infrastructure investments

Brazil Bonds Loans M&A Project & Infrastructure Finance

The Brazilian government will pursue an infrastructure concessions program based on market factors, rather than political concerns, Wellington Moreira Franco, executive secretary of the Investment Partnerships Program, or PPI, told LatinFinance.

"The decisions that were made previously in the infrastructure sector were very dependent on political options," Moreira Franco said in an interview in New York. "If you built a railroad, it wasn't because you were helping to transport a product but because of a political decision. Now, when you see the proposed concessions from the transportation ministry, they are linked to the transportation of goods and products."

Earlier this month, the PPI included 25 projects in a new infrastructure concessions program called Projeto Crescer. The program has 11 transportation projects so far, including four airports, three railways, two highways and two port terminal concessions. It also has 11 energy projects and includes granting concessions for three state water and wastewater companies.

Some of the projects are holdovers from the previous government's Logistics Investment Program, or PIL, a massive infrastructure concessions program that was put on hold as former President Dilma Rousseff faced impeachment charges. After Rousseff left, the administration of President Michel Temer decided to overhaul the program by lifting the limits on returns and reducing government lending.

"Her government wanted to fix the rates of return and work with low user rates. No one can fix prices. Prices are always a consequence of the relationship between buyer and seller," Moreira Franco said. 

The Rousseff administration also provided subsidized financing below market rates and allowed state-owned companies to participate with minority shares in infrastructure concessions. "An artificial system was created, and this artificial system created an imbalance in the concessions and raided the National Treasury," he said. 

During Rousseff's time in office, the national development bank BNDES promised to finance up to 70% of highway concessions with spreads based on the TJLP long-term interest rate. Now, however, BNDES will finance up to 50% of investments in the next two highway concessions with loans for up to 15 years.

For the following highway projects, and also for concession contracts signed through the end of 2015, BNDES will finance up to 40% of investments. The bank will charge 150bp over TJLP, plus an extra spread based on the credit risk of the borrower. For the four airport concessions, BNDES will cover as much as 40% of investments at the same terms.

BNDES has also said it will stop providing bridge loans to infrastructure concessionaires. The development bank often followed the short-term loans with financing with longer tenors. "BNDES is not in a position to give what it agreed to give with these bridge loans," Moreira Franco said.

FI-FGTS, an infrastructure fund managed by federal savings bank Caixa Economica Federal, will also provide funding, and federal bank Banco do Brasil will coordinate syndicated loans with commercial banks, he said. "Any investor who is interested has two places to go, not just one," he said.

Marcelo Allain, the secretary of investments and partnerships, said BNDES has BRL18bn ($5.55bn) and FI-FGTS has BRL12bn to finance the projects and buy debentures issued to cover the length of the concessions, as long as the concessionaires buy completion bonds to guard against construction risk.

User fees will likely go up as concessionaires seek more financing at market rates, Allain said. But Moreira Franco said the measures the government is taking to reduce spending and balance the budget will likely lead to lower interest rates, which will reduce the cost of capital for developers.