Infrastructure investments in Brazil are at the top of the agenda of the new president. This opens many opportunities for private investors to take part in projects across sectors, like airports, railroads, highways and ports.
The last eight years were lacking in strong investments but now with the new government and more competition for commercial banks to become lender plus a much smaller lending role for The National Development Bank, BNDES, the government is hoping to attract local and foreign investments. The government knows the importance of approving the social security reform which will not only reduce the country's deficit but also indirectly lead to more available funds from the pension plans to be invested in the capital markets and on long term investments.
Energy is a mature industry in Brazil with steady cash flows and relatively easy access to credit. Most of the project, especially in renewables, have been financed by BNDES. We expect projects to continue to be financed in local currency by local banks.
Airports and ports
In Brazil, the most opportunities for infrastructure projects currently are in the country's airports and ports. The federal government has put a lot of focus on these projects and has recently (and successfully) auctioned several regional airports. These were auctioned to different global airport servicing companies resulting in a huge win for the country in terms of improving infrastructure. The market is already growing and Brazil is optimistic for the future of these types of infrastructure projects.
The financing of projects is expected to change in Brazil. The National Development Bank (BNDES) has been the main source for financing projects in Brazil but has stated they don't want to be a lender of choice anymore. Instead, they want to promote and facilitate investment without acting as sole lender. BNDES is very important for the country. It is responsible for 50% of the energy expansion and has financed 70% of all renewable energy projects. In transportation almost everything has been financed by the bank. The bank has, over the years, structured financial mechanisms for the entry of the private sector in long-term financing. BNDES's new role will have a big impact on the local lending and borrowing environments and could even help projects get financing faster from commercial banks.
With this change, there are questions about what would be the optimal financing model for new projects. There are possibilities of the project being 100% financing by a private bank or a mix of international funds and local funds. These choices all depend on the project's characteristics and sponsors.
For the last thirty years, the biggest sponsors of infrastructure projects in Brazil have been the local construction companies, most of them involved in Lava-Jato. This is no longer the case and the Brazil is already seeing a new wave of sponsors that are coming in from all around the globe from France, China, Japan and Canada. This will open doors for more projects and economic growth in the country.
Challenges in the market
There can be some challenges when it comes to financing local projects in foreign currency one of which being the cost of hedge for these projects. Some of the legal framework surrounding infrastructure concessions can lead to tricky situations for investors. The lack of standardization in contracts and the roles of agents in Brazil for all projects can also be a huge challenge for investors.
Investors looking to the Brazilian market should have a trusted partner to help establish and manage a Special Purpose Vehicle (SVP). TMF Brazil can help with all foreign and local investment needs. When it comes to complex financings, we have the expertise to access collateral agents in multiple countries around the world. Our global advantage makes it so we can handle any transactions that will depend on local and foreign currencies. Talk to us.
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