Infrastructure opportunities in Brazil

22/12/2008 Latin Counsel


1.  INTRODUCTION

As a result of recent economic growth[1], Brazil must undertake significant efforts to carry out a major renovation of its infrastructure including its ports and logistics, airport and transport, railroads, highways, energy and sports arenas. 

The development and improvement of the current Brazilian infrastructure is crucial for maintaining the country’s growth. Investments in infrastructure are essential for creating jobs and business opportunities, increasing competitiveness and improving peoples’ lives. Developing infrastructure is therefore a high priority for Brazil. 

Furthermore, there are events that will be held in Brazil in subsequent years, including the 2014 World Cup, which will require the completion of some major infrastructure projects in a short period of time.

Several new investment opportunities in attractive infrastructure projects in Brazil are expected in coming years, including the:

(i)   Construction of an outer-ring-road in the State of Rio de Janeiro which will cost approximately USD 350 million;

(ii) Modernisation and expansion of the Port of Santos which will cost approximately USD 400 million. 

(iii)   Construction of a hydroelectric power plant and the energy transmission line of Rio Madeira which will represent approximately 3.5% of the installed energy in Brazil; and

(iv)  Construction of a railway in São Paulo for freight trains that will cost approximately USD 300 million. 

Achieving such goals requires mutual cooperation between the Brazilian public and private sectors. The participation of foreigners is also essential in providing both capital and expertise in the development of Brazil’s infrastructure. 

2.  FOREIGN PARTICIPATION IN INFRASTRUCTURE INVESTMENTS IN BRAZIL

Although foreign participation in infrastructure dates back more than 150 years, especially in railroads, it was only after the National Privatisation Programme in 1990 that foreign capital was definitively considered a crucial mechanism for overcoming Brazil’s difficulties. Eighteen years later, Brazil is the second most attractive country in Latin America for investments in infrastructure[2].

An amendment made to the Brazilian Constitution in 1995 abolished the distinction between national and foreign companies. This has resulted in the identical treatment of Brazilian and foreign companies, including with regard to public bids.

Foreign companies may participate in bids for infrastructure projects either directly or through the formation of a consortium. The advantage of a consortium is that the foreign company can take part in mainstream projects without the risks associated with a lack of knowledge of the Brazilian market and its regulatory rules. The bidding process usually requires bidders to incorporate a specific purpose vehicle to implement the infrastructure project.

As a result of this environment, successful foreign investments in infrastructure projects in Brazil have been carried out in all sectors. One such investment was by the Portuguese company, Brisa, which participated with Brazilian companies in the largest infrastructure-focused consortium in Brazil - CCR - and which is responsible for some of the most important highway concessions throughout the country.  OHL, a Spanish company acting directly, won seven key public bids for the concession of highways in 2007. The electricity sector also presents various investment opportunities, many of which were seized in past years by overseas investors such as the Spanish company, Elecnor, which in recent years has won the concession of 616 kilometres of transmission lines. 

3.  MAIN STRUCTURES

Infrastructure projects in Brazil may be structured in many ways. Most Brazilian infrastructure projects are currently being implemented through regular public concessions or  public private partnerships.

Brazilian law requires that a bidding process be carried out for the selection of the sponsor that will be responsible for the implementation of a specific infrastructure project.  The terms and conditions for the implementation of the project, including the financial conditions and the structure of the project, must be disclosed to all participants in the bidding process.

The private sponsor will at all times be under the surveillance of the Brazilian authorities, who are primarily responsible for the development of any infrastructure project in Brazil. 

As previously mentioned, foreign entities may participate in such bidding processes and will be afforded the same rights and obligations as those granted to Brazilian bidders. In most projects, however, foreign entities are required to incorporate a subsidiary (usually a special purpose vehicle) in Brazil for the purposes of participating in the bidding process.  

4.  FUNDING OF PROJECTS

Most of the infrastructure projects in Brazil have their funding (partially or totally) granted by the Brazilian Development Bank (“BNDES”). 

BNDES is a federal public company associated with the Ministry of Development, Industry and Foreign Trade. The main activity of the BNDES is to provide long-term financing for endeavours (either by Brazilians or foreigners) that contribute to the country's development.  The main goals of BNDES are to promote economic growth and competitiveness in the Brazilian market and to increase the quality of life of the Brazilian population by reducing social inequalities and creating employment opportunities. 

BNDES usually promotes funding through (i) long-term senior loans; (ii) loan onlending agreements; and (iii) bridge-loans for specific projects.

Less frequently, some Brazilian infrastructure projects use foreign capital for their funding such as that granted by the Inter-American Development Bank (“IDB”) and the International Finance Corporation. Other infrastructure projects have their financing granted by various entities such as by a mix of funding from both the BNDES and the IDB.  

5.  FINAL CONSIDERATIONS

Despite the current economic turmoil, the Brazilian infrastructure sector will provide a number of investment opportunities in coming years. Non-Brazilian companies willing to participate in that process, either alone or in a consortium with local partners, will encounter a legal system that favours the equal treatment of national and foreign entities that have the appropriate expertise and financial soundness to undertake these long term projects.


[1] Although the Brazilian economy is expected to slow next year as a result of the global crisis, it is nevertheless expected to grow at a rate of least 3% next year.

[2] http://www.bbc.co.uk/portuguese/reporterbbc/story/2007/04/070425_infraestrutura_cg.shtml (accessed on 21 November 2008)