Infrastructure: An exemple of how the lack of infrastructure investments threatens the Brazilian growth.

BR-163 is symbol of Brazil's problematic road infrastructure

By André Borges Lucas do Rio Verde, Sorriso, Sinop and Guarantã do Norte, Mato Grosso
The mud-strewn path of federal highway BR-163
From chaos to mud, the road spans approximately 3,000 kilometers. The trucker that went for the first destination, with chaos, is today agonizing in the interminable lines forming around the Port of Santos. Those that went for the second option, try their luck in BR-163, the promise of a federal highway that is completing 30 years this week and that has never been really fulfilled. 
There's no third way. The drama experienced today by those that farm soybean and corn in the north of Mato Grosso state, Brazil's biggest grain producer, reveals to the world the embarrassing situation of national logistics. The confusion now happening in the ports of the South and Southeast regions cannot be understood and explained only due to the limitations of the ports. To understand them, one must face the mud.
For a week, Valor traveled over 1,500 km of BR-163, also known as Cuiabá-Santarém highway. The trip started in the Mato Grosso grain-producing region, in the municipalities of Lucas do Rio Verde and Sorriso, and continued north to the port of Santarém, in the state of Pará, where BR-163 has its terminus in front of a small ocean of fresh water: the meeting of the Tapajós and Amazonas rivers. On the Mato Grosso side, the one-way road, with its weathered asphalt, bears intense truck traffic. Berms are precarious and don’t even exist in some stretches. But the route becomes even more complicated as it reaches the Pará state border.
From the dust-ridden municipality of Guarantã do Norte (Mato Grosso), which marks the border between the two states, until the city of Santarém, the traveler experiences 1,094 km of adventure. As one advances toward the Amazon, the reasons that lead thousands of truckers to skip this road and hurdle for days in the roads leading to the Santos and Paranaguá ports become clearer. 
Almost 600 km of BR-163 remain exactly as they have always been: a risky dirt road. In the asphalted stretches – many times only a couple of meters are actually covered – there are serious signage problems. Potholes and quicksand test the ability of drivers. Trucks skid over the mud. Sometimes they roll over in the middle of the way, spilling tons of grains into the jungle.
Opened 30 years ago, BR-163 was born with the vocation of turning itself into one of the main corridors for transport in the Central-West region. From its northward path, it's possible to access the Amazonas waterway, a privileged exit for Brazilian production to reach global buyers. But a series of problems have been delaying the true fulfillment of its mission.
Cuiabá-Santarém is an example of the main bottlenecks blocking the evolution of Brazil's logistics infrastructure. Problems with eminent domain and environmental licensing, corruption and mismanagement have undermined the highway's potential. A recently concluded study by the National Confederation of Industry (CNI) calculates that up to R$1.4 billion could be saved every year with cargo transportation in the region if the highway was actually concluded. If really converted into a viable alternative for cargo transportation, the route would help to reduce bottlenecks at Brazil's busiest ports, along with directly lowering transportation costs for farmers. Calculations by Movimento Pró-Logística, a lobbying group of several business sectors of Mato Grosso for the betterment of Brazil's infrastructure, point to a reduction of 34% in transportation costs for each ton of soybean and corn leaving farms. Brazil's domestic transportation prices are 425% higher than Argentina's and 370% higher than in the US.
Devoid of alternatives, farmers continue trying to do their part. In the 2011/2012 crop, the so-called “Nortão” (Big North) of Mato Grosso harvested 52% of the Brazilian soy and corn crop. That's 68.2 million tons. It's an impressive result that should be celebrated, but farmers are not in a very festive mood. “I have the impression that we actually created a problem by overproducing. It's as if we had done something wrong and now we'll have to pay the price for that,” says farmer Elso Vicente Pozzobon, who's also a board member of Mato Grosso trade group of soy farmers Aprosoja. “We invested in technology and more than doubled our production in the last few years. But our road has been the same and the situation became unsustainable.”
BR-163 is not the solution for all the problems of Brazilian infrastructure, but concluding it could foster a turnaround in the country's logistics map. Transportation capacity for the ports of the North region is estimated at 45.5 million tons. In addition to Santarém, ports such as Vila do Conde (Pará) and Santana (Amapá) would start to be accessed, among other terminals being planned for the Amazon region. The benefits would be not only domestic. Using Brazil's northern coast can cut down three to five days from the travel time between Santos and the Dutch port of Rotterdam. That means greater competitiveness and lower costs.
Domestic distribution of goods in Brazil would also benefit. The road would help with the transportation of manufactured goods from the Manaus Tax Free zone, which today follow by boat to Belém (Pará), to later travel a further 2,900 km by road to São Paulo. Through BR-163, the trip would be two days shorter.
“There's no reason for this not to move ahead. We have to turn the country's logistics map around and think about the Northern arch,” says Edeon Vaz Ferreira, managing director of Movimento Pró-Logística. “We expect our work to move forward and the situation to be solved as soon as possible. The country cannot dismiss that anymore.”
In the 745 km of BR-163 between Cuiabá and the Pará border, an industrial census by trade group Sebrae, focused on fostering business development, listed more than 800 companies that would gain a boost from the highway's conclusion. While the promise goes unfulfilled, businesses that live in some way from the road's degradation continue to prosper.
In Lucas do Rio Verde, the Sabiá Tire Shop has become a mandatory stop for truckers. Owner Lúcia Abegg says she opened the store ten years ago with two employees. It has today 14 tire workers who are unable to meet all demand. “We have been seeing 200 trucks a day with all sorts of problems. Trucks create a huge line in front of here. They get nervous with the waiting. We try to serve everybody, but it's hard,” Ms. Abegg says. “They break the coil, the brakes, the spacers, get flat tires. We're unable to meet all of the demand. We have to work seven days a week non-stop.”
(Ruy Baron contributed to this article.)

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Infrastructure: BNDES concentrates 89& of its investments in five industries; three relate to the Brazilian infrastructure.

BNDESPar concentrates 89% of its investments in five industries

By Fernando Torres and Francisco Góes São Paulo and Rio de Janeiro
In the last ten years, BNDESPar, the investment arm of the Brazilian Development Bank (BNDES), increased the concentration of its money allocations. A study conducted by Valor shows that the oil and gas, mining and power industries, which accounted for 54% of BNDESPar’s portfolio in 2002, jumped to a 75% share in 2012. The study is based on information released in financial statements over the last 11 years and took into account direct and indirect stakes in publicly traded companies.
If two other sectors — food and pulp and paper — are included, concentration rises to 89% of the total portfolio. In financial terms, this means that of R$74.5 billion the company had invested at the end of 2012, R$66.3 billion were allocated in only five industries, with R$8.2 billion spread among all others.
Concentration increased not only because of strong gains in Petrobras and Vale share prices in good part of the last decade, but also because of new injections in those two companies and in others from those sectors, including power concerns Eletrobras, CPFL and MPX and oil company OGX more recently.
BNDESPar director Julio Raimundo
BNDESPar’s investment portfolio rose more than fourfold between 2002 and 2012, to R$74.5 billion from R$16.2 billion, considering its stakes’ market value. Growth aside, there’s a significant decline since its peak, at the end of 2010, when the portfolio was valued at R$102 billion.
Such decline from the peak is explained both by falls in stock prices, with R$10.8 billion represented only by the drop in Petrobras share prices, and by stock sales, either directly on the market or as a R$6 billion transfer to state-controlled bank Caixa Econômica Federal at the end of 2012.
An industry analysis of BNDESPar’s portfolio also allows one to notice that the telecommunications sector, which in 2002 accounted for 11% of the total, now represents less than 1% of investments.
Out were telecoms, in were food companies, with meat processors standing out. Today represented by JBS, Marfrig, BRF and Vigor (dairy company recently split up from JBS), the food industry wasn’t even showing in the 2002 portfolio, but at the end of 2012 it account for 6% of total investment. LBR, another dairy company, is not included because, aside from not being publicly traded, it was written off for the expectation that its investment will not be recovered.
An industry that despite highs and lows over the 11 years always had a relevant share in BNDESPar’s portfolio was the pulp and paper one, which closed last year accounting for 8% of total investments. In 2002, it accounted for 10%.
It’s curious to note that none of these five most-representative industries — oil and gas, mining, power, food and pulp and paper — is among the sectors elected as priority in the industrial policy announced by the administration of former President Luiz Inácio Lula da Silva, which listed capital goods, software and pharmaceuticals, along with innovation-related projects, as the country’s preferred ones.
This criterion tends to be followed in investments made by BNDESPar in emerging companies, such as the ones by seed-capital fund Criatec, which has a formal selection process. But the big capital injections, defined by another department at the bank, follow another policy, not always clear.
Looking at individual companies, the ten largest investments amount to 85% of the portfolio: Petrobras and Vale account for 60% of the total, whereas pulp producer Fibria, JBS, Brasiliana (holding company of power utilities Eletropaulo and AES Tietê), power companies Copel, CPFL, CEG and Eletrobras and pulp and paper manufacturer Suzano respond for another 25%.
Excluding Petrobras, Vale and Eletrobras, the top 20 individual investments represent 85% of the portfolio. Along with the companies already mentioned, the list includes paper manufacturer Klabin, foundry Tupy, steelmakers Gerdau and CSN, logistic concerns ALL and Ecorodovias, power companies MPX, Light and Cemig, airplane maker Embraer, food producer Marfrig and telecommunications company Oi.
And where does BNDESPar’s money come from? In addition to funds from sales of appreciated stocks, the state firm got from BNDES, between 2007 and 2012, R$50 billion to increase its capital, which ended last year at R$60 billion.
BNDES, for its part, has as funding sources both infusions from the federal government and money from FAT and PIS, social programs funded by payroll taxes, and also more recently directly from the Treasury, which injected more than R$350 billion in the development bank since 2007.
BNDESPar gained weight as the international crisis was more acute. Between 2002 and 2007, the company’s equity was practically stable, at about R$10 billion. In 2008 and 2009, it got an R$20 billion injection, and since then it got another R$30 billion.
The largest amount invested in a single company was in 2010, when Petrobras had its big capitalization. The government injected R$22 billion for BNDESPar to use the money purchasing shares in the state-owned oil company’s public offering. Petrobras then used the proceeds to help in the purchase of 5 million barrels of pre-salt oil (at a total R$71 billion), with the money returning to the National Treasury.
BNDESPar director Julio Raimundo said that portfolio variations reflect the capital-intensive nature of some industries, such as oil and gas, mining, pulp and paper and steelmaking. He also said that the greater investment concentration in some industries is due to stock-price rises and capital injections made by the government, among them the R$22.4 billion transferred by the Treasury to invest in Petrobras’s capital increase in 2010. “Despite the concentration, which could lead to the false conclusion that BNDES is reproducing a certain standard of the Brazilian economy’s compartmentalization, it’s important to verify [BNDESPar] moves with lower values, but representative in portfolio terms,” Mr. Raimundo says. 
As an example of those moves, he cites the case of the information technology industry. He said that of the four Brazilian companies in the industry that are publicly listed, three – Totvs, Linx and Bematech – have the BNDES “footprint.” But he admitted that “unfortunately, the [IT] industry [in Brazil] still doesn’t have the importance in capital-market terms that it has in more developed economies.”
Criticism to portfolio concentration would be more valid, Mr. Raimundo said, if Brazil faced an intrinsic and even cultural situation where capital markets have several technology companies that don’t count on BNDES support. “The history we’re writing, and I’m sure will become clearer in the future, is that technology companies that sought the stock-market path have the BNDES footprint,” Mr. Raimundo says.
The executive says the trend is banks increasing their portfolio exposure to riskier industries such as those involving technology or intangible assets, for instance. He says that in 2012 alone, BNDESPar made ten new direct investments in companies focused on clean technology and innovation. The amount invested in those deals was R$1.9 billion. Also last year, the bank injected R$882 million in share subscription deals from three pulp and animal protein companies (Fibria, Suzano and Marfrig), as well as a Contax bond issue.

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Infrastructure: More on Brazilian PE and Bond Infrastructure Funds

Asset Managers plan funds dedicated to tax-free infrastructure bonds.
Brazil’s largest asset-management firms are brewing a product that promises to soon attract individual investors, be them Brazilian or foreign. Infrastructure bond funds, with returns exempt from income taxes, will emerge as a long-term option. They’ll probably have a similar format to real-estate investment trusts, perhaps even hitching a ride on the success of those portfolios. The asset-management firms of the five largest Brazilian banks – Itaú, Bradesco, Banco do Brasil, Caixa and Santander – are preparing to launch their own funds. Other firms, big and medium-sized such as BNP Paribas, Rio Bravo and BRZ, also plan on launching their own.

Regulation is what still separates those funds from clients. A working group created by the Brazilian Financial and Capital Markets Association (Anbima) has been discussing the structure of the new product since December. The group will present a proposal to the Securities and Exchange Commission of Brazil (CVM). “We would like those funds to become viable in the first half of 2013,” says Ricardo Mizukawa, who coordinates the group and chairs Anbima’s Committee on Credit Receivables Investment Funds (FIDCs).

The working group is reporting to three Anbima committees – of FIDCs, fixed-income funds and Equity Investment Funds (FIPs). The idea is making those infrastructure funds hybrids, with characteristics of the three investment categories, together with some aspects of exchange-traded funds (ETFs) and real-estate funds. “It will be a different type of fund from others on the market today, but we’re trying to seek the best practices for each of those tools,” Mr. Mizukawa says.

Law 12,431, approved in 2011, paved the way for the creation of those funds. The reason is that it exempted Brazilian or foreign individual investors from paying income taxes over bonds to finance infrastructure investments considered priority by the government. The tax cut is valid for direct investors in those bonds, but also for those who invest in funds that buy these securities.

The proposal gathering strength at Anbima is of a closed-end fund, as in one that doesn’t allow withdrawals. The reason is that since those bonds will finance long-term projects, such as hydroelectric plants and highways, they must have limited liquidity. The asset manager could face difficulties to sell them quickly, hurting other shareholders. Besides, the portfolio can’t allow too much available cash. To guarantee the tax exemption, the fund must have at least 67% of its assets invested in the bonds for the first two years, then rising to 85% after that. “We’re seeking a design that, given the asset’s liquidity, takes trading activity into consideration, as in real-estate funds,” Mr. Mizukawa says.

Besides the lack of regulation, some asset managers say there still aren’t enough bonds to complete a fund. “It has to do a bit with who comes first: the egg of the chicken. Until demand is created, there won’t be supply,” Mr. Mizukawa says. He thinks the creation of the funds will foster the launch of those bonds. Brazil needs about R$250 billion a year in infrastructure investments, he says. “Even if funds capture a small share of that, say 5%, it would already be more than R$10 billion.” The government will also create a fund, with initial investment of R$7 billion, to pass on subsidized funds to banks to finance those projects.

Joaquim Levy, superintendent director of Bradesco’s asset-management firm, says that not only the traded securities, but 30 other projects authorized by the government already justify creating such a portfolio. “The fund is ready. Once regulatory issues are clarified, it’s just a matter of pushing the button,” Mr. Levy says. The portfolio model created by the asset-management firm is of a closed-end, exchange-traded fund. The executive says it would be interesting if regulation also allowed the fund to be expanded. That way, even after the fund was closed, new bonds could be included and they could receive additional investors.

BB DTVM’s fund is also in advanced stages, according to Carlos Takahashi, the firm’s president. He says investors would be interested in an exchange-traded fund. “If there were a factor that allowed real-estate funds to go well, that’s exactly it,” he says. The asset manager is currently surveying the interest of foreign investors. Despite Brazil having lost a bit of prestige among international investors lately, Mr. Takahashi says there’s still demand for the fund. “Foreign investors are awaiting the arrival of a differentiated product,” the executive says, noting that those investors are currently orphaned from the fat premiums offered by sovereign bonds and the more obvious stocks in the Brazilian market.

The presence of foreign investors would help to boost the market’s liquidity. Mr. Takahashi considers that individual investors will be the big public of these portfolios. Since pension funds already have the tax benefit, exempting returns doesn’t constitute a differential for them. But there’s the possibility of institutional investors also wishing to invest in these funds as a way of taking advantage of the skill shown by asset managers to pick these bonds.

“Our concern today is not with the investor-demand side, but with the asset side. It’s still a small volume in the face of diversification demand,” says Allan Hadid, general director at BRZ. He says only four bonds issued so far are eligible to join those portfolios. The securities were issued by companies Montes Claros, Rio Canoas, Autoban and Concessionária Raposo Tavares (Cart). The asset manager aims to create an infrastructure fund, but is still seeking projects so it can launch its own bonds.

Rio Bravo also wants to originate its own securities for an infrastructure fund. It already has government approval to a tax-exempt bond for renewable energy. “The securities that have been reaching the market have tighter premiums. Our idea is to try and offer something different,” says Rio Bravo asset manager Bruno Margato.

It could be more a desire than concrete prospects, but the fact is that despite the lack of rules and assets, all managers say they expect to have their fund offerings ready still in the first half.

© 2000 – 2012. All rights reserved to Valor Econômico S. A. . Read our terms and conditions on http://www.valor.com.br/international/about-legals/terms-conditions. This material cannot be published, rewritten, redistributed or broadcasted without authorization from Valor Econômico.

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Infrastructure: Brazilian Infrastructure needs $40bn more in investments per year

Following to my most recent essay about funding the development of Brazilian infrastructure through capital markets mechanisms, please take a look on this article published on Valor Economico, one of the most influents Brazilian economic journals:

Infrastructure needs $40bn more in investments per year

Brazil will have to add $40 billion a year in investments in infrastructure projects, and of those, the government expects private-sector banks to provide up to 40%, Luciano Coutinho, president of the Brazilian Development Bank (BNDES), estimated. He and Chief of Staff Gleisi Hoffmann spoke to Valor after participating of the “Brazil Infrastructure Forum 2013” Friday in London, an event organized by Valor.

“The government alone will not be able to provide all of that,” Ms. Hoffmann said. “We want to attract the private sector” to the concession program, she added. Earlier, both had spoken to an audience of more than 300, in an objective and detailed way, about this program, its challenges and the debate over its financing sources.

Today the country invests about $45 billion a year in infrastructure projects, Mr. Coutinho said. And it will have to raise that amount to somewhere between $85 billion and $90 billion if it wants to grow in a sustainable way, task that needs to be shared by state banks, including Banco do Brasil and Caixa Econômica Federal, and by the private sector. BNDES, the sole lender of long-term projects at the moment, is hitting its limit, Mr. Coutinho admitted.

A capital injection in BNDES being discussed with the Ministry of Finance is not likely to happen soon. The National Treasury is expected to inject up to R$8 billion in the bank this year to increase its core capital, following the Basel rules.

For now, Mr. Coutinho said, private-sector banks may use R$15 billion in reserve-requirement deposits at the Central Bank that are not remunerated for infrastructure financing. As these reserves rise, new allowances may be provided for investments. “Banks tell us they want to participate, but together with BNDES. They want to co-finance.”

Foreign investors with whom Mr. Coutinho talked in the last few weeks were very concerned with the foreign-exchange risk of those operations. They fear a sudden currency devaluation may subtract a good share of the investment return. They will have to handle the currency risks, Mr. Coutinho assured. “In these talks, I have been saying that the longer-term trend of the real is to appreciate. Therefore, if there is some sudden depreciation, I recommend them to be calm, not fall into panic, because there may be a fall, but the exchange rate [of the real] will rise again,” he said.

Other aspects that are being studied and discussed refer to insurance and collateral for these financing and works. Mr. Coutinho said the government plans to combine, at the Brazilian Guarantee Agency, assets of three already-existing guarantee funds: For shipbuilders, the power industry and for public-private partnerships. Public guarantees are used in exceptional cases not covered by insurance, such as regulatory surprises, social insurrection in the country or some natural accident, like earthquakes or similar events. “We sent out people to study this,” Mr. Coutinho said, citing Korea’s export insurance as an example to be verified, as are the ones offered by European countries for the construction of high-speed trains.

The government launched an offensive to seek money for investments and adopted a more modest, more humble speech, businesspeople and bank representatives present at the conference in London said. Mr. Coutinho is talking to big pension funds, sovereign funds and, he said, the growing interest both of foreign and national investors in the Brazilian concession program is remarkable.

Ms. Hoffmann considers that Brazil is “starting 2013 with another prospect. Our industrial production is reacting, investments also started to react, and it’s time for us to present the concessions in an open and consistent way to investors. The government is very determined.”

The conference also had the presence of Maurício Tolmasquim, president of the Energy Planning Company (EPE), and Bernardo Figueiredo, president of the Planning and Logistics Company (EPL).

© 2000 – 2012. All rights reserved to Valor Econômico S. A. . Read our terms and conditions on http://www.valor.com.br/international/about-legals/terms-conditions. This material cannot be published, rewritten, redistributed or broadcasted without authorization from Valor Econômico.

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Infrastructure: New Article

Please check on my new essay about funding infrastructure projects in Brazil via capital markets at