How Can Development Finance Institutions Help Unleash Brazil's Investment Potential in Infrastructure?
Brazil is one of the largest economies in the world and a major player in global trade and food production. However, the challenges in infrastructure faced by the South American giant are comparable to the country’s magnitude, which threatens the country’s competitiveness. Currently, Brazil’s infrastructure quality ranks 81st out of 137 economies according to the World Economic Forum and varies greatly across regions within the country notably between the north and south. These deficiencies are reflected in the country's high logistics costs, estimated at around 15 percent of GDP compared to 8-10 percent in OECD countries.
Low investment levels are largely to blame for the poor state of Brazil’s infrastructure. Between 2008 and 2016, total investments averaged 2 percent of GDP, less than half of levels in the 1980s. Current investment falls significantly short of the estimated ~ $110 billion per year needed until 2040 to meet the country’s infrastructure investment needs.
Despite the private sector accounting for around half of total infrastructure investment between 2008 and 2016, private finance has dropped markedly since 2012 partly as a result of the economic crises and corruption scandals, such as Lava Jato. Moreover, financing from traditional sources is increasingly difficult, as the Brazilian Development Bank (BNDES)–the main provider of long-term infrastructure finance–, is replacing its highly subsidized interest rate (known as TJLP) with a market-based long-term interest rate.
The glass half full
To meet the ever-increasing demands for infrastructure and given the shifting financing landscape, Brazil will need to mobilize financing from capital markets, pension funds, and commercial banks both locally and internationally. Infrastructure needs will generate immense market opportunities for equity and debt investors, construction companies, and financial markets. Recent success in international bids show that private capital can be attracted to projects and institutional and regulatory improvements should continue.
In this new landscape, international development finance institutions such as IDB Invest have a key role in enabling investment in less traditional sectors, helping to mitigate risks and catalyzing additional investment resources. For example, it is estimated that the Brazilian pension fund market currently invests 80 percent of its funds in public debt and only 2 percent in private debt securities.
Regarding the former, in 2019 IDB Invest approved financing for a water and sanitation PPP in Northeastern Brazil aiming to improve wastewater infrastructure in 15 municipalities in the metropolitan region of Recife, a project that also includes financing from local development banks.
IDB Invest is also working to stimulate capital markets and mobilize local and international resources including from institutional investors, through innovative risk mitigation instruments. Total Credit Guarantees provided by IDB Invest in 2018 have been instrumental in meeting the financing needs of the Santa Vitória do Palmar wind farm and the Pirapora solar project by covering full debt payment to the bondholders until maturity. The guarantees, in the amounts of R$130 million and R$315 million respectively, helped ensure the subscription of the bonds at a competitive price and term (in fact, both bond issuances were oversubscribed), as well as the AAA local credit rating for Santa Vitória do Palmar and the A+ global rating for Pirapora.
Finally, Credit Funds can mobilize international investors looking to support projects based on specific criteria. IDB Invest’s new Credit Fund for Infrastructure in Brazil will do this by ensuring that investments comply with the IDB Group’s social and environmental safeguards and corporate governance and integrity standards. With this value added, IDB Invest seeks to help build trust and mobilize long-term financing for robust and sustainable infrastructure projects in Brazil.■
* Read more about our analysis of Brazil’s infrastructure challenges and opportunities in our recent publication and De-Brief.
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