Tarcísio Gomes de Freitas is so keen to build infrastructure in Brazil that the former Army captain is often called Thor, the hammer-yielding god. That’s not surprising. He’s been known to bang the gavel down so hard at successful auctions that he’s destroyed more than a few.

“We want to give some work to the craftsman who makes hammers,” he often jokes.

Freitas, 46, has been Brazil’s minister of infrastructure since Jair Bolsonaro became president in January 2019, and he already has a long list of concessions in the bag, from energy to transport and water. Brazil’s concession plan is forecast to bring in as much as BRL250 billion ($44.5 billion) in investment between 2019 and 2022, and the minister is confident that it will. Banks, he says, are becoming keener to take on more risks to finance projects, even as volatility swells in the local capital markets in the run-up to the general elections in October 2022.

“I think we will not have a credit problem,” he tells LatinFinance at the busy Port of Santos, the largest in the country, just 50 miles from São Paulo, Brazil’s economic capital.

“If you see what is happening with the latest projects, the amount of financing via capital markets is already greater than financing from, for example, a development bank,” he says, clad in jeans and a bright yellow security jacket at the foot of an imposing 32-foot-high Chinese vessel embarking with a cellulose shipment. “That is great. I think new projects will materialize.”

Brazil’s competitiveness has long been hampered by logistics bottlenecks and inefficient infrastructure. While modernization plans have been launched again and again over the past 25 years, the progress has been painstakingly slow because private investors have been hesitant to finance projects and government incentives have been scant. At the same time, Brazil’s public banks like BNDES, a development bank, have crowded them out.

Freitas hopes to change this – and he means business, as can be seen with both his gavel pounding and the straightforward, no-nonsense approach he has honed as an engineer to get business done.

“Today, you don’t have a credit supply problem, you have a risk appetite problem,” he says. “So, what is already happening is a gradual shift from a corporate finance regime to a project finance regime. We are starting to see the first projects financed in the project finance framework, such as Line 16 of the São Paulo Metro. We already have this happening on highways. This will facilitate access to credit.” 

A lot of money is needed. Claudio Frischtak, a founding partner at Inter.B Consultoria, an economic consultancy in Rio de Janeiro, estimates that Brazil needs to invest the equivalent of 4.15% of its GDP per year over the next two decades to modernize infrastructure. That’s far more than the 1.8% of GDP in 2018 and 1.7% in 2017, according to the latest available data.

Progress is being made. The Port of Santos, the largest in Brazil and Latin America, recently attracted investments worth BRL3.2 billion ($889 million) in three projects for a container terminal, a pulp and paper terminal and a railway to improve port logistics. The port accounts for 28% of the country’s foreign trade, moving major exports like soybeans, pulp and paper, and orange juice. Freitas says the port will attract an additional BRL6 billion in investment in the coming years. At the same time, the Santos Port Authority is being prepared for privatization by the end of 2022. Vitória, another large port located northeast of Rio de Janeiro in the state of Espírito Santo that moves cars, coffee, pig iron, steel products and sugar, will be the first to be privatized in Brazil as a trial run for Santos, he adds.

“The secret here is to structure good projects,” says the military-trained engineer who quit the Army in 2008 to enter the civil service. “If you structure good projects, you won’t have funding problems.”

Billions more in investment

Apex, the government agency that promotes investment opportunities to international investors, says 126 auctions of private concessions will be held in 2022, ranging from airports to ports and national parks. The auctions are expected to generate over $67 billion in investment. In addition, the government expects to raise around $12 billion from a capital increase of Eletrobrás, a state-controlled electric power utility that is to be privatized in the first half of 2022.

“The investment partnerships program, which was launched in 2016, facilitated $121 billion in investments and $26 billion in concession fees from 2019 to 2021,” Adalberto Netto, Apex’s chief investment officer, tells LatinFinance.

“The Bolsonaro government has given a very strong push since 2019 to really disinvest and to privatize many areas of the economy: ports, airports, mining rights, hospitals, roads, railways and so on. So, it is really a part of a positive shift toward expanding the role of the private sector,” Netto says.

Debenture boom

As part of this push, financing tools have been adapted to attract more investors to help accelerate the modernization of Brazil’s infrastructure. Debentures, for instance, have become an increasingly popular instrument to finance projects.

Companies raised some BRL150 billion from the 500 so-called incentivized infrastructure debentures issued since they were created a decade ago, according to Natália Marcassa, the planning and partnership secretary at the Ministry of Infrastructure. Of the debentures, which provide tax exemptions to Brazilian individual investors, BRL36 billion was raised during the first 10 months of 2021 – more than double the BRL15 billion in the year-earlier period – with an average tenor of 11.5 years, according to official figures. Of the debentures, 40% were acquired by financial institutions, 26% by individuals and 20% by investment funds, the figures show.

A reform is now underway to extend the tax benefits of infrastructure debentures to institutional and foreign investors, and regulations have been proposed to mitigate exchange rate volatility and take other steps to attract more international investors to invest in these project bonds.

“We want to reach two types of investors with deep pockets: institutional investors and international investors,” Marcassa said last December in a debate held by Valor Econômico, a Brazilian newspaper. These investors only account for 5% of the investors in project bonds, according to government figures.

Companies that raise funds through the sale of infrastructure debentures would also be eligible to the tax benefits.

“They will benefit from an interest rate rebate of up to 30% per year,” Inter.B’s Frischtak and a few other economists wrote in a recent paper. “The main point is to reduce companies’ funding costs so that they can extend securities to institutional investors at more attractive interest rates.”

New incentives

Freitas is confident that widening the sale of debentures will bring more investment to infrastructure projects.

“When you create a series that allows the issuance of debentures abroad in foreign currency and according to the rules of the country of origin, you also create another access door to credit,” he says. “In the end, you are removing some obstacles and you are addressing this issue of investors’ appetite. You will make the banks, once they are syndicated, have more appetite for risks, accepting, for example, to take more risks during the pre-completion period and to place the project in capital markets after the financial completion.”

The infrastructure debentures reform was approved by the lower house of Congress last July, but it still must gain the nod of the upper house in 2022.

“It is a change in legislation that facilitates access to debt financing for infrastructure,” says Apex’ Netto.

Freitas adds that international investors will also be able to issue infrastructure debentures abroad, opening even more opportunities for projects to be financed – and for him to be able to slam down his gavel at auctions.

“If you create a new class of debentures, you can bring in more money. You will be able to issue these bonds abroad,” he says. “Once the bill is passed, there will be more and more project bonds.” LF