The Brazilian government’s latest attempt to increase GDP growth has received a guarded welcome from financiers, while the country’s second-quarter results show just how much effective stimulus measures are required.
Last month, the government announced the outline of a package of road and rail concessions, which it hopes will boost infrastructure and reinvigorate GDP growth. The package envisages investment of about $66 billion, and another round of concessions – ports and airports – is expected this month.
André Esteves, CEO of BTG Pactual, believes the package will help the Brazilian economy. "It is a big step for Brazil," he says. "Infrastructure is a big challenge, and no one can solve this problem alone. We need government participation but they should leverage the investors in the private sector. This is the largest concession programme in the history of Brazil. It’s not just good news, it’s excellent news."
However, not everyone is optimistic that this latest measure will achieve national growth. RBS, in a note to clients, says: "Contrary to consensus, financing for infrastructure spending is not the critical barrier for increasing potential GDP growth in Brazil. Speaking to the different layers of government, it becomes evident that structural and institutional issues are serious bottlenecks. We do not envisage infrastructure spending in its current form to be a game changer for Brazil."
Transfer risk
There is also doubt about whether or not the government will be able to deliver on its announcement. Fitch Ratings says in a report that there are substantial execution risks to transferring these concessions to the private sector.
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| Pablo Sorj, partner in the infrastructure projects group at Brazilian law firm Mattos Filho |
Pablo Sorj, partner in the infrastructure projects group at Brazilian law firm Mattos Filho, says the ratings agency’s fears of delay are well grounded but thinks there is greater political will today, which will help these projects avoid the delays that beset earlier projects. The government is desperate to stimulate the economy – growth in the second quarter of 2012 was below analysts’ expectations at 0.4% quarter on quarter and down by 0.5% when compared with the same period in 2011. Growth remains sluggish – in 2010, the economy grew by 7.5% – despite the five-percentage-point reduction in the headline Selic rate in the past year. Investment declined by 0.7%.
"The president [Dilma Rousseff] is very focused in terms of execution, and her government is getting known for good implementation and oversight," says Sorj. "We are quite optimistic that many projects will be developed and will be transferred to private investors who are interested in helping us to develop our infrastructure."
However, he says there is often a misconception among foreign investors that these are privatizations in a classical sense. "If you read between the lines, the government is still keeping a lot of control," he says.
In recent airport privatizations, the government’s airport agency, Infraero, retained a majority holding in the new privatized companies. BNDES, the government development bank, will provide most of the financing at a subsidized interest rate of 5.5%, and most of the ultimate investors in the projects will be the pension funds of quasi-sovereign entities – and so the state will remain intricately connected with all these recently announced infrastructure opportunities.
"This is a good step to get the private sector more involved but it’s not a 100% transfer to the private sector," says Sorj, who notes that important details, such as the bidding rules, are yet to be announced. However, he believes the private sector will play a role in financing infrastructure through the highly anticipated project-finance bonds.
These tax-free corporate bonds for infrastructure-related companies have struggled to come to market, but with some minor revisions and clarifications expected to be finalized in the coming months – for example, on the use of proceeds rules – banks are lining up to underwrite in a new market that the government expects to grow to $50 billion.
Selective appetite
Sorj has worked on some bonds in the pipeline and is optimistic. "We know there is risk appetite for acquiring bonds for some projects," he says. "[Investors] will not want to take construction risk, or certain risks that are embedded in the beginnings of projects. [However], for roads and airports where you have brownfield [projects], there will be pension funds that will be willing to invest."
Sorj also expects interest from international investors.
BNDES is planning to take an active role in the development of this market by financing projects through the acquisition of large allocations of these project bonds, with the remaining going to domestic and international investors.
Esteves says BNDES has had a positive impact on the development of the Brazilian economy but future financing growth should come from new sources. BTG Pactual expects to issue an infrastructure bond in the near future.
"It will be another tool to promote this crowding-in of capital markets," says Esteves. "The development of the capital markets in Brazil should reduce the size of BNDES – and BNDES knows that. It has the right mindset."
