By Thierry Ogier
Brazil’s planning minister Paulo Bernardo Silva tells Emerging Markets that a revolution in financing Brazil’s infrastructure is afoot. Although prospects are improving, foreign investors remain cautious.
For many years, the business community in Brazil has faced the same challenge: how to expand its activities in a country of continental proportions whose infrastructure is deteriorating - fast. On one hand, the state was always broke and the share of public spending in infrastructure has been falling dramatically; on the other, private investors lacked confidence to take on financial risk.
Successive governments have tried to break the vicious circle. Lula, renown for not having much faith in privatization, was widely expected to step up state interference in key sectors, such as energy and transportation. Yet, financing opportunities are emerging thanks to a general improvement in the investment climate. Paulo Bernardo Silva, the planning minister, is already talking of a “revolution in financing infrastructure”.
The ongoing concession process of 2,800 km of roads, which are due to attract investment of more than $6 billion within six years, is expected to be completed by July. “Criticism of the poor state of our road network is absolutely justified,” he acknowledges.
“The IDB has consistently showed it was ready to help finance infrastructure as a partner. Beyond the funds it may contribute directly to finance various projects, it also serves as an anchor to attract private institutions,” he says.
Nevertheless, the government feels uneasy with the fact that “we have paid back the bank a lot more than we have borrowed in recent years, and the trend is for our IDB portfolio to decline rapidly,” the minister says. “This is neither good to us nor for the IDB. We therefore need to renew these partnerships.”
The IDB is expected to release a $400 million credit line to boost urban infrastructure in six Brazilian cities. The funds will be channeled through the state-owned Caixa Econômico Federal (CEF), and financial details are due to be unveiled during the IDB’s annual meeting in Belo Horizonte, Brazil. In water sanitation alone, says Bernardo, the country’s financing needs are equivalent to an annual investment of nearly $10 billion over 10 years to bring services to the entire urban population.
PPPs in waiting
Meanwhile, the IDB has also supported efforts to set up a special fund in local currency to provide long-term financing in infrastructure. The so-called InfraBrasil fund has already received firm commitments from local institutional investors such as Funcef (pension fund of CEF's employees) and Petros (pension fund of the state-controlled oil company Petrobras) for a 25% stake each.
“We have a target of a first closing at 900 million reais (around $430 million) by the start of the second quarter of the year. If we have further demand, we have authorization to go up to 1.5 billion reais,” says Geoffrey Cleaver, the fund manager with ABN Amro Real. The Brazilian subsidiary of the Dutch bank is also contributing 30 million reais to the fund it has been asked to manage.
Banesprev, the pension fund from the former state-owned bank Banespa has also invested 25 million reais. “During this initial stage, we essentially aim at forming the fund with a maximum of local investors. The best way for us to match liability is to have a strong investor base in Brazil, as this is a fund in local currency,” says Cleaver.
However, he adds that not all is plain sailing. “We have had tentative talks with foreign investors, but we have come across some reluctance, I must admit,” he adds. “They prefer to take a more cautious approach, check out the fund, see how it operates. Probably they would come in a second closing, or in a second fund.”
InfraBrasil will provide 15-year loans for a target of a 12% return plus IGP-M (a comprehensive inflation index taking into account wholesale and retail price variations).
Several private equity investors, such as Angra Partners and GP Investimentos, have also prepared their own funds to finance capital-intensive transport logistics and energy projects.
Back at the ministry, Bernardo is confident that the much-delayed public private partnerships (PPPs) will eventually take off after the recent completion of a $1.5 billion guaranteed fund. The first project to be included in the PPP portfolio is a 700 km road link between the inland state of Minas Gerais and northeastern Bahia. “We are preparing several other long-term contracts based on the PPP legislation, including for road maintenance,” he says.
However, the state of São Paulo is expected to come out first with its own PPP to finance a new metro line in the state capital city. “Private investors will have to buy the trains and operate the system, while the public sector remains in charge of infrastructure work,” says Carlos Melles at Unibanco, which acts as an adviser to the state government. “This is a new impetus to finance infrastructure,” he says.