Just how enthusiastic are Brazilian bankers about Brazil’s $66 billion infrastructure program?
It’s certainly ambitious. The existing package envisages 10,000 kilometers of new railways together with building or upgrading 7,500 kilometers of roads. Moreover, there is more to come: a package has been flagged for ports and waterways, which is to be announced imminently. Brazil is well behind on infrastructure. Conservatively, the country needs $300bn per year to sustain 5% annual GDP growth so the package is highly welcome.
There is much to whet the appetite of investors. After years of seeing infrastructure as a public sector game, the Rousseff government is keen to coopt private investors and has put them centre stage. The size of the programme should ensure a consistent flow of projects. The lower real should make investment more manageable for foreigners. And lower interest rates are likely to prick interest of Brazilians and foreigners alike.
Railways will dominate the programme, accounting for R$91bn and roads a more modest R$42 billion. A second round of airports privatizations is likely to include Galeão, the international airport for Rio de Janeiro and Confins, the main airport for Belo Horizonte and maybe Salvador and/or Manaus.
There are some key obstacles to overcome. Some of Brazil’s concessions have been cack-handed, particularly the second round of Federal roads and the recently-completed airports. And the BNDES has effectively squeezed out private participation.
The government seems to be heeding foreign investor calls to reform structures. On roads, it is likely to pay more attention to ensuring investment plans are followed through with proper sanctions. It is also reviewing airport concessions and is likely to exclude the kind of smaller players that won in the first round.
The BNDES itself seems to recognize that it is not big enough to sustain all the investments and senior staff are making the right noises about working with foreign investors. The bank is looking to help structure debentures and is committed to guarantee sharing. The development of fixed-income capital markets will allow sponsors to introduce leverage and reduce the need for commitments of sponsor equity over the medium term.
Bankers say a series of bonds are set to test the opening of the debenture market. They agree that initially pricing will be difficult and perhaps expensive but are confident that tenors will extend and prices come down quickly.
Foreign investors have reason to be cautious. Brazil has been hobbled by high interest rates, a lack of predictability, poorly written contracts and a distaste for private money. This time round it really does look different. This could be a game changer for Brazil.