The Brazilian government has adopted two important measures by means of federal decrees, both dated April 1st, 2013, in order to facilitate the financing of infrastructure projects in Brazil, namely: (i) Decree 7595/2013 - that reduced to zero the rate of the Brazilian Tax on Exchange Transactions (Imposto sobre Operações de Crédito, Câmbio e Seguro, ou relativas a Títulos ou Valores Mobiliários - IOF) due in connection with these credit transactions1; and (ii) Decree 7696/2013 – that created a new state-owned company called Brazilian Management Agency of Funds and Guarantees (Agência Brasileira Gestora de Fundos e Garantias - ABGF).
According to Decree 7696/2013, ABGF is a public enterprise (empresa pública) to be structured as a corporation (sociedade anônima) linked to the Ministry of Finance, with an indefinite duration. Its sole shareholder will be the Federative Republic of Brazil (the Union). A General Shareholders' Meeting shall be convened for the incorporation of ABGF by the Attorney-General of the National Treasury (Procuradoria-Geral da Fazenda Nacional) pursuant to article 87 of Law No. 6404 of December 15, 1976 (the Brazilian Corporation Law – BCL)2 and its bylaws will be approved in such meeting.
The initial capital stock of ABGF will be R$ 50 million, divided into 50,000 common shares, all registered and without par value. The Finance Minister will designate a representative for the practice of acts necessary for setting up and installing ABGF3.
ABGF aims to have a key role in supporting the provision of guarantees for the large infrastructure concession projects launched by the Brazilian government to boost the economic growth. According to the local newspapers, ABGF should manage funds worth R$ 25 billion, R$ 11 billion for infrastructure financing and R$ 14 billion for foreign trade.
The main investor demand is for credit guarantees for concession of highways and railways. In infrastructure projects guarantees are very important, especially at the beginning of the operation. Such guarantees are required from the time the investor wins the concession and needs to hire a bridge loan to finance the venture up to the effective fundraising in the financial or capital markets. The goal of the Brazil government with the offer of guarantees by ABGF is to give more security to the private sector investments while reducing borrowing costs.
As a result of the reduction to zero of the IOF tax rate, since April 2, 2013 the Brazilian private banks can finance with its own resources infrastructure projects, capital goods, innovation and technology under the same terms and conditions of the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social – BNDES).
In accordance with the provisions of item I of article 1 of Law No. 12096, of November 24, 2009 (Law 12096/2009), as amended by Provisional Measure No. 606, of February 18, 20135, the Union is authorized to grant economic subsidy, under the equalization mode of interest rates (interest equalization), to financing transactions contracted up to December 31, 2013 to BNDES intended for: (a) the acquisition, leasing and production of capital goods, including components and related technology services, and the associated working capital; the production of consumer goods for export; the electric power sector; the export structures of liquid bulks; the engineering projects; to technological innovation; and investment projects for the establishment of technological and productive capacity in knowledge-intensive industries and engineering; and (b) the logistics infrastructure projects directed to highways and railways concessions granted by the federal government. The interest equalization corresponds to the difference between the borrower's final charge and the cost of funding, plus the remuneration due to BNDES and the financial agents accredited by BNDES.
Furthermore, Decree 7975/2013 determines that the IOF tax is reduced to zero for any transaction contracted as from April 2, 2013 by a Brazilian financial institution as lender, either with public or private resources, to finance operations for any of the purposes mentioned in the previous paragraph, in accordance with the criteria lay down by the Brazilian Monetary Council (Conselho Monetário Nacional – CMN) and by the Central Bank of Brazil (Banco Central do Brasil - Bacen).
Before the enactment of Decree 7595/2013, only the funding with public resources, which implied the transfer of funds of BNDES by the lender to the borrower in the capacity of accredited financial agent, was exempt from the IOF tax, and the applicable IOF tax rate to the funding with private resources was 1.5% per annum, plus 0.38% at the time of the contracting of the loan.
The main objective of Decree 7595/2013 is to ensure that the private financial institutions use for this type of funding the compulsory deposit resources that the government released in 2012. It is estimated that the private banks will have approximately R$ 15 billion of compulsory deposit resources to finance long-term investments6
Before the enactment of Decree 7595/2013, only the funding with public resources, which implied the transfer of funds of BNDES by the lender to the borrower in the capacity of accredited financial agent, was exempt from the IOF tax, and the applicable IOF tax rate to the funding with private resources was 1.5% per annum, plus 0.38% at the time of the contracting of the loan.
The main objective of Decree 7595/2013 is to ensure that the private financial institutions use for this type of funding the compulsory deposit resources that the government released in 2012. It is estimated that the private banks will have approximately R$ 15 billion of compulsory deposit resources to finance long-term investments7.
Footnotes
1 The IOF is a regulatory tax and the rates are decreased or increased by the Brazilian government whenever the authorities decide to foster or reduce the cost of the transaction. The applicable tax rate may vary from zero to 25% and depends on the kind of the operation. Up to this ceiling (25%), the Executive Branch can amend the applicable rate at any time, considering the monetary and exchange policy goals of the Brazilian government.
2 Article 87 of the BCL establishes that:
"Article 87. The first general meeting, or general meeting of incorporation, shall be held on the first call with the presence of subscribers representing at least half of the capital, and on the second call with any number.
Paragraph 1. At the meeting, which shall be presided over by one of the founders and shall have a subscriber acting as secretary, the receipt of the deposit mentioned in item III of article 80 shall be read and the draft of the bylaws discussed and voted upon.
Paragraph 2. Regardless of its type or class, each share shall have the right to one vote; a majority shall not have the right to modify the draft of the bylaws.
Paragraph 3. Upon satisfying himself that all legal formalities have been observed and that there is no opposition from subscribers representing more than half of the capital, the chairman shall declare the corporation incorporated, and thereupon the election of the officers and members of the audit committee shall be held.
Paragraph 4. The minutes of the meeting, drawn up in duplicate, after being read and approved by the meeting, shall be signed by all subscriber present or by as many as are required to validate a decision; one copy shall remain in the possession of the corporation and the other shall be used for registration at the Commercial Registry."
3 The sole paragraph of article 4 of Decree 7976/2013 clarifies that to act in such capacity (representative) is deemed to be a relevant public service and it is unpaid.
4 In 2012 the President Dilma Rousseff announced the granting of concessions comprising 7.5 thousand kilometers of highways and 10 thousand kilometers of railways to stimulate private investments. In addition, the Brazilian government intends to bid on more than 150 port terminals and 270 regional airports. The list also includes the Confins Airport in the State of Minas Gerais and the Galeão Airport in the State of Rio de Janeiro. The economic team wants ABGF to be in full operation in the second half of 2013, when the notices of concession are expected to be issued.
5 Law 12096/2009 authorizes the granting of economic subsidy to BNDES in financing transactions aimed at the acquisition and production of capital goods and technological innovation, among other matters.
6 This change was introduced by Decree 7975/2013 which contains the new wording for item XXVIII of article 8 of the IOF Regulation approved by Decree No. 6306, of December 14, 2007, as follows:
"Art. 8. The tax rate is reduced to zero in the credit operation, without prejudice to the provisions of § 5:
(...)
XXVIII - held by a financial institution, with public or private resources, to finance transactions contracted as from April 2, 2013 for the acquisition, leasing and production of capital goods, including components and related technology services, and the associated working capital, the production of consumer goods for export, the electrical energy sector, the export structures of liquid bulks, engineering projects, technological innovation, and investment projects for the establishment of technological and productive capacity in knowledge-intensive industries and engineering and logistics infrastructure projects directed to highways and railways concessions granted by the federal government, referred to in art. 1 of Law No. 12,096, November 24, 2009, and in accordance with the criteria lay down by the Brazilian Monetary Council and by the Central Bank of Brazil."
Paragraph 5 of article 8 is not applicable to the case at hand and reads as follows:
"§ 5º. It is established, regardless of the duration of the operation, the additional rate of thirty-eight hundredths of a percent of the IOF on the value of credit operations that deal with items I, II, IV, V, VI, X, XI, XIV, XVI, XVIII, XIX, XXI and XXVI."
7 Bacen has, from time to time, changed the level of reserves and compulsory deposits that financial institutions in Brazil are required to maintain with Bacen. Reserve and compulsory deposit requirements reduce the liquidity to make loans and other investments. In addition, compulsory deposits generally do not yield the same return as other investments and deposits because (i) a portion of such deposits does not bear interest, (ii) the financial institutions may be obligated to hold some of the compulsory deposits in Brazilian government securities and (iii) a portion of the deposits must be used to finance government programs. On March 22, 2013, these resources amounted to R$ 12.8 billion, corresponding to 20% of demand deposits that are subject to the compulsory deposit required by Bacen.
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