An investor that enters into public contracts for the development of infrastructure projects in Brazil finds itself in a contradictory situation. The once abundant resources of public development banks, which were largely responsible for concession financing in recent years, are now rare due to the fiscal crisis faced by the federal, state and municipal governments. However, from a global perspective, rarely it has been seen so much liquidity and availability of resources in the world.
Therefore, if internally we see potential borrowers eagerly looking for funds, in other parts of the world the funders are looking for opportunities to lend its resources with the same intensity. The hand that prevents the balance between supply and demand, which does not go unnoticed, is the exchange rate risk to which the investor that develops infrastructure projects in the country is exposed to considering that 100% of its receivables are adjusted for inflation rates and linked to the Brazilian real.
Although domestic companies are constantly accessing corporate funding in foreign currency, the same does not occur with funding of infrastructure projects (project finance), which has a fundamental rule that establishes that revenue used to pay off debt shall be adjusted the same manner as debt. A long-term hedge, that could represented an obvious solution, does not exist in Brazil, and could only potentially exist with prohibitive costs.
Accordingly, foreign funding in Brazil for infrastructure projects is virtually close to zero. How could we reverse this situation and provide true funding for the sector with a growing and permanent investment, safeguarded from fiscal bumps and temporary trends?
The answer lies on following successful experience of other countries, such as Colombia, Chile and Peru, in which, without a bank like BNDES, the infrastructure sector has developed and attracted not only foreign funding, but also foreign investors in large scale. We propose three solutions:
1) Indexation of tariffs charged to final users (or public counterpayments, in PPPs) to a foreign currency variation rate, or a basket of foreign currency variation rates. If the remuneration of the investor is readjusted by 20% or 30% by such exchange rate, a relevant part of the funding of the respective project could be taken out of the country. Resistance to this suggestion is based on false beliefs that it would be harmful to final users. This belief is fostered by the trauma of the Brazilian real’s maxi devaluation. However, if we compared the cost of funding in U.S. dollar, for example, (variations of Brazilian real x the U.S. dollar plus interest of 5% a year applied to infrastructure projects) with the cost of funding in Brazilian real (SELIC rate – even considering BNDES’ funding, the effective cost to the country is calculated by the SELIC rate plus a project risk spread) over the past 20 years, we would conclude that the cost of financing in U.S. dollars is less than the cost in Brazilian reais. Therefore, if this model is adopted, it would result in lower tariffs to final users. Past experience shows that maxi devaluations are followed by economy adjustment and even their impacts can be mitigated by a funding structure in which the investor has a grace period for debt payment in case of maxi devaluations, as already proven.
2) Creation of a mechanism through which the concessionaire’s revenues are partially indexed to foreign currency with no effects on the tariffs charged to final users. In this case, the grantor authority would take the risk (or benefit) of the exchange variation rate, for more or for less, through a graphic account maintained with the concessionaire (similar to the former petroleum account, which regulated the price of oil products stipulated in contracts between the federal government and Petrobras).
3) Offer, by the government, directly or through the BNDES, of a long-term swap to investors, being paid in a percentage that could be, for example, 5% a year. Although the Brazilian real could lose value in face of the U.S. dollar (what would not necessarily occur), foreign exchange reserves and increased public revenues would act as a natural protection to the government. This would not bring any severe impact on the Treasury since infrastructure project funding debts are adjusted over long periods.
The adoption of these measures, individually or collectively, would allow Brazil to have a broad and long-termed funding for its much-needed infrastructure projects at a cost that tends to be even lower than the current costs. (With respect to the agricultural sector, to which this topic is relevant, a new Law was recently approved, allowing the adjustment of agricultural titles negotiated with nonresident investors by an exchange rate variation – Law 13,331).
Furthermore, these measures would certainly attract the participation of foreign investors who do not feel comfortable investing in projects that rely solely on a single source of funding.
Brazilian infrastructure sector’s reality can actually be subject to a positive revolution, which would contribute to the control of public expenditure.