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).

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