Funding alternatives for infrastructure in Brazil

July 2013  |  SPECIAL REPORT: Infrastructure & project finance

Financier Worldwide Magazine

July 2013 Issue

July 2013 Issue

As an emerging market, Brazil is currently a focus for international investors. We will therefore examine and summarise a number of alternatives foreign investors have for investing in Brazil. We will also look at infrastructure requiring local investment as a result of the 2014 FIFA World Cup that will be held in Brazil and the 2016 Olympic Games that will be held in Rio de Janeiro. 

We will first summarise basic procedures for transferring funds internationally to Brazil and related issues, bearing in mind that Brazil has an extensive system of control on cross-border currency transactions. 

The Brazilian Central Bank regulates and controls all foreign currency flows in Brazil. The Central Bank is the government agency responsible for managing, regulating, controlling and recording foreign-exchange transactions in foreign investments. It does this under guidelines established by the Brazilian Monetary Council. 

Foreign capital brought into Brazil must be registered with the Central Bank’s Electronic Information System, which is known by its Portuguese acronym SISBACEN. SISBACEN registration is done by filing a report. It is not subject to prior Central Bank analysis. There are no requirements for minimum investments or that local parties have an equity interest, except in some cases such as financial institutions, insurance companies, airlines, and others, as provided for in the applicable legislation. 

Foreign investments are divided into three categories for control and registration purposes: (i) long-term investments (‘direct investments’), (ii) foreign loans and (iii) portfolio or indirect investments (‘portfolio investments’). 

The recipient company and the foreign investor’s representative in Brazil are responsible for registering the investment with the Central Bank. Investments must be registered within 30 days of when the funds enter Brazil, except for tangible assets, which must be registered within 90 days of customs clearance. Any omission or incorrect information or failure to provide timely information subjects the parties responsible for the registration to legal penalties. 

Registering foreign capital with the Central Bank makes it possible to: (i) convert loans into direct investment (so long as the creditor expressly agrees); (ii) pay principal and interest on foreign loans; (iii) repatriate profit, dividends and interest on equity; (iv) reinvest profit and dividends; and (v) repatriate the investment. 

The 2014 FIFA World Cup will be held in Brazil and the 2016 Olympic Games will be held in Rio de Janeiro. These events will certainly attract a good deal of investment to Brazil. Expected investments include building and remodelling sports venues to host the games, as well as accommodations, leisure facilities and related infrastructure. 

Under the Investment Acceleration Program, which includes a number of economic policies, the Brazilian government is placing a priority on infrastructure investment projects in areas such as sewage, housing, transportation, energy and water resources, among others. 

The Investment Acceleration Program entered its second phase, known as PAC 2, in 2011. It has the same strategic scope and adjustments that have been made based on experience from the previous phase. These adjustments include more funds and more partnerships with states and municipalities to develop infrastructure projects. 

According to the Brazilian government, the PAC 2 infrastructure projects will add dynamism to Brazil’s economy and expand the range of business opportunities available to the private sector. PAC infrastructure projects are related to government plans for transportation, energy and other areas. They include the Better City Project, Citizen Community Project, My House, My Life Project and the Water and Electricity for Everyone Project. 

Port and airport infrastructure projects are included in the PAC as projects that will help ready Brazil to host the 2014 World Cup. Additionally, the PAC includes highway and railroad projects, particularly a high-speed train, as well as hydroelectric plants, thermoelectric plants and urban transportation projects. 

The Brazilian Development Bank, known by its Portuguese acronym BNDES, will likely provide much of the financing for these PAC projects. 

The BNDES is Brazil’s main source of long-term development financing. It offers several financing methods for Brazilian companies of all sizes, as well as for government agencies. It provides funds for investments in all areas of the economy. The BNDES emphasises three factors that it considers strategic in any project, from the analysis phase through monitoring implementation: innovation, local development and social and environmental development. 

The BNDES disbursed R$94.6bn between January and September of this year. Industry and infrastructure together accounted for 68 percent of the BNDES’s total loans, with R$33.5bn going to industry and R$31bn going to infrastructure. 

Other important government-owned banks that provide financing for projects in their areas of interest include Banco do Brasil, Caixa Econômica Federal, Banco do Nordeste do Brasil (the development bank for the northeastern part of Brazil) and Banco da Amazônia (the development bank for the Amazon region). 

In the past few years new laws have allowed funds from the FGTS, which is a mandatory savings account funded by employers in employees’ names, to be invested in infrastructure. This is done through the FGTS Infrastructure Fund, or FI-FGTS. The FGTS Infrastructure Fund has quickly become one of the most active participants in the Brazilian market and invests in a variety of infrastructure areas. Its investments include both debt and equity.

Project bonds/debentures (infrastructure debentures) are another way of facilitating corporate funding for infrastructure projects. Debentures are debt securities issued by publicly-traded and closely-held Brazilian corporations. Debentures can be nonconvertible, convertible or exchangeable for shares. They can be secured, guaranteed by another corporate entity or secured by a floating charge or other type of security interest. They can be senior or subordinated. 

In June 2012, Federal Law 12,431 introduced new debenture rules to encourage private sector financing for long-term infrastructure projects. 

One of the most important changes introduced by this law was to reduce the income tax on income from debentures issued by special purpose companies incorporated to conduct infrastructure investment projects or projects for intensive economic production in research, development and innovation that are considered priorities by the Brazilian government. These are known as ‘infrastructure debentures’. 

Under law 12,431/2011 (which was amended by Law 12,715/2012), the income tax rate on income from infrastructure debentures received by individuals resident in Brazil or abroad is 0 percent, meaning they are effectively tax-free. Income from these debentures earned by corporate entities domiciled in Brazil is subject to a 15 percent income withholding tax. 

To benefit from these advantageous tax rates, infrastructure debentures must be issued by special purpose companies created to implement “projects for investment in infrastructure or for intensive economic production in research, development and innovation considered to be priorities under regulations issued by the Brazilian government”, among other things. 

Finally, another well-established form of corporate funding is private equity. Private equity investment aims to acquire significant, or even complete, control of a company with the goal of earning a high rate of return. Private equity funds invest in assets that are not publicly owned or that are publicly owned but the private equity buyer plans to take private. Although the funds for these investments come from private markets, private equity firms invest in both private and government-owned companies.


Ricardo Barretto Ferreira da Silva is a senior partner and Priscila Pinheiro Ribeiro Faro is a senior associate at Barretto Ferreira e Brancher Sociedade de Advogados (BKBG). Mr Barretto can be contacted on +55 11 9 6339 3349 or by email: Ms Faro can be contacted on +55 11 9 9167 4524 or by email:

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Ricardo Barretto Ferreira da Silva and Priscila Pinheiro Ribeiro Faro

Barretto Ferreira e Brancher Sociedade de Advogados

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