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May 2013 
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Infrastructure Investment In Brazil |
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Selina Harrison, January 2010 |
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Page 2 of 2 |
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For example, the ability of foreign investors to obtain finance for infrastructure projects at reasonable interest rates can cause problems. “If from one side the financing from a foreign lender allows the sponsor to negotiate a much lower interest rate, the downside is the exposure of the sponsor to the currency risk, as the loan will be denominated in a foreign currency and the revenues of the project company will likely be denominated in Brazilian reais,” explains Mr Dutra. Another option would be for the investor to obtain funding from one of Brazil’s financial institutions, but this could ultimately be quite expensive. Indeed, most of Brazil’s financial institutions gain a significant portion of their investment capacity through government bonds, known as the SELIC benchmark rate. As these bonds are relatively low-risk and generate attractive revenues, the banks pay a significant rate of interest back to the government for this funding. These factors have contributed to the high rates of interest that Brazil-based lenders place on loans, leaving foreign investors with the option of either obtaining domestic finance with a higher interest rate and no currency risk, or obtain low-interest financing in another market, and accept the currency risk.
However, there are some Brazilian financial institutions that are more supportive towards foreign investment for infrastructure projects, and simplify the lending process associated with such deals.
Mr Fernandes cites Espirito Santo Investment Brazil (ESI) which, with the aid of the IABD loan, has provided funding for of some of Brazil’s major infrastructure projects. These include a metro line for São Paulo and a ring road. ESI also provides project management advice and operates in structuring financial resources in foreign currency, together with multilateral agencies and export credit agencies. “ESI supports projects by providing funding in local currency for short-term operations and structure of the long-term funds, taking a portion of funding through its own means or acting as a lending agent to public banks including BNDES and BNB such as Santo Antonio dam, a concession of federal highways, wind farms and transmission lines,” explains Mr Fernandes.
But Mr Dutra warns that the Brazilian tax and legal systems are complex and difficult to navigate. As such, investors should seek advice from legal professionals, in order to identify any issues that could arise as a consequence of an infrastructure deal. Investors unfamiliar with the region should take extra care. “For first-time investments, a joint venture with a Brazilian partner and a good relationship with an applicable regulatory agency would make the investment process easier, enabling the investor to become familiar with the Brazilian infrastructure sector and providing insight into any legal and tax issues which may be relevant,” says Mr Dutra. It should be noted that the overall regulatory framework associated with Brazil’s infrastructure sector is relatively stable. The industry has seen a lot of change in the last two decades and is now regulated by established agencies that act independently of the government, thereby reducing the possibility of regulatory reform occurring in the middle of the investment process. “Fortunately, such changes have taken place less frequently than in previous years and much less in comparison to some other countries, where Congressmen are apparently under the strong influence of their presidents and have been altering their countries’ laws recurrently,” notes Mr Fernandes, who nevertheless warns that regulatory factors should still be taken into consideration when sponsors are assessing any investment destination.
Overall then, the future is likely to be bright for Brazil’s infrastructure sector, and for those who choose to invest into it. Despite the decline in construction activity this year, Business Monitor International forecasts that Brazil’s construction industry will grow by 8.61 percent in 2010. Furthermore, plans by the government to allocate a further 358bn reais towards PAC investment post-2010 will capture investors’ attention across the globe. Also, infrastructure projects connected to the World Cup and the Olympic games will inject around $50bn into Brazil’s economy by 2027, as well as adding 120,000 jobs annually until 2016. As such, investors can be confident that, as long as they tap into local expertise and plan for potential pitfalls, infrastructure in Brazil should provide a reliable, long-term source of returns.
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