The New Infra Structure Concession Model in Brazil

In the last decade, Brazil has experienced an obsolete finance system for the infrastructure projects leading to the bankruptcy of such model. To overcome the issues created by the old model and to foster the economy to get away of the deepest recession since the 1930, the Brazilian authorities are designing a new model which is more similar to the developed economies. During the last years, the infrastructure concessions were strongly dependent from the long term subsidized finance lines from BNDES (Brazilian National Development Bank) and CEF (Caixa Economica Federal Bank). There was no space for players like pension funds, investment funds, international investors due to the fact it was not possible to compete against the interest rates offered by these banks (CEF & BNDES).

The adopted model described on above failed for some reasons as follows:

1.      The fiscal crisis avoided new contributions from the National Treasure;

2.      Some projects are still facing problems with the credit grant from the BNDES and CEF, due to the demand reduction or restrictions caused by the involvement in the “Jet Wash” investigation;

3.      The commercial banks are not willing to grant additional bridge credits once there is a lack of continuity mainly driven by the BNDES.

Based on this, the PPI Counsel (Investment Partnership Program) defined in September 2016 anew governance for the infrastructure concessions and privatisations. The guidelines are:

1.      Higher project maturity;

2.      International competition incentives;

3.      Middle size companies incentive;

4.      Better rationality at the required investments (triggering demand)

5.      More transparency in the service KPI′s.

The new model already approved by the PPI counsel will search for an inclusion of the capital markets, specially bonds at market taxes and a wider range of finance sources leading to pension funds, international investors, investment banks and regular personal investors to invest in these projects.

What happened in the past? What was the reason why only the big construction companies were organizing themselves under a consortium model to participate at the infrastructure concessions? Normally these companies have a strong balance sheet with enough fixed assets to cover the required guarantees from BNDES and CEF, however, after the “Jet Wash” investigation it became almost impossible for these companies to attend the public bids.

It is very likely in the next concession bids, the consortiums will be formed by infrastructure operators, middle size construction companies and investment funds. Even though these new players do not have strong balance sheets to offer high volume of corporate guarantees, they do have very good operation expertise, financial capacity (equity) and will bring a diversification in the segment.

The financial institutions need to “keep in mind” the client profile has changed. It is necessary to reduce shareholders and corporate guarantees, therefore as a replacement they should explore the projects guarantees as the concession emerging rights and capability to generate free cash flow and in addition to accept international guarantees.

The new model has some implications:

1.      The increase of the internal rate of returns and WAAC to be considered in the financial modelling of such projects as the subsidies are gone;

2.      The second interesting issue is the fact there will be an increase of the long term financial sources. The concession companies will also get international finance lines with a suitable exchange rate coverage;

3.      More participants will be interested in to participate in the concessions due to greater variety of the financial sources.

I am sure we will see in the near future new players coming into this segment leading to benefits to the Brazilian society and all stakeholders involved in this process.