Latin Finance - November/December 2012 - 19

Brazil infrastructure

The final issue for foreigners is tax treatment. The 6% financial tax, the IOF, still applies to government bonds. The debenture law excludes withholding tax, but no one can be sure that the government will not impose an IOF tax on this new class of debentures if the appreciation of the real becomes a macroeconomic priority, says Leitão. There may be scope for foreign participation in smaller and higher risk and higher yielding deals — anathema to Brazilian pension funds — but appealing to specialists outside the country, says Jacob. Jacob admits the high yield market is likely to be limited, but says interest from some of his client base is high. They are particularly interested in infrastructure related to agroindustry such as sugarethanol and soya as well as mining. Deals will come from issuers including smaller and mid-sized companies with brownfield projects, he says.

Equity markets

If the debt markets turn out to be a damp squib, there is space in the equity markets for infrastructure funding, says Levy. Brazilian infrastructure companies account for $300 billion in market capitalization, making the sector bigger than many stand-alone emerging markets, such as Chile, he adds. “Brazilian infrastructure companies are large, well developed and in many

cases have a track record. Also, they have physical assets and a natural hedge against inflation in the form of price-linked contracts,” Levy says. Strong dividend flows are also likely to be popular at a time when investors are seeking certainty. “Any company that has real assets, that has clear profits and cashflow, people appreciate,” says Levy. As well as the shape of financial markets, much of the success will be down to the details of the programme. The government’s determination to upgrade logistics is welcome but bankers say careful attention needs to be paid to the concessions. The second round of federal road concessions in 2008 and airport concessions earlier this year have both been heavily criticized. The government insisted on very low tolls in the road concessions, which then meant that the winning bidders consistently failed to meet investment targets without there being sanctions in place. Airport concessions saw operators with experience confined to smaller airports win contracts, which has provoked concern about their ability to manage the larger Brazilian airports. The government raked in nearly R$24.5 billion through three airport privatizations, nearly 350% over the minimum bid. Felberg believes the government is listening to investors as it designs

concessions for its new programme. It is looking to insert enforceability clauses in road contracts specifying sanctions such as fines and penalties, he says. He expects Odebrecht to be successful in future rounds of airport concessions, even though Brazil’s giant construction company failed to be in any of the winning consortia for the first round of airports, he says. He predicts the government could add size stipulations into contracts, he says. A Senate Commission on Infrastructure Services has already been set up to see whether the airport concessions are viable or concession holders will simply not be able to invest given the burden of paying down the concession fee. “There are legitimate questions about the existing concessions and technical qualifications,” says Eduardo Farhat, manager of the Brazil Mezzanine Infrastructure Fund for Darby Overseas Investments in São Paulo. “You have to tread very carefully in the airport sector.” Ports are likely to prove even trickier thanks to unclear legislation which has enabled ferocious competition between public and private ports. “These projects require a lot of capital especially as the port infrastructure is old in Brazil and you don’t have a take-or-pay contract. They are not easy to finance,” says Zoffmann. LF

Easy does it Continued from page 14

participation of private forces in long-term finance was the very high short-term interest rates in Brazil. Turning this page was the big novelty in Brazil,” he says. The market response at home has been positive, although foreign investors have been more circumspect. Some veteran executives say they never had it so good, after decades of turmoil in Brazil, and that the outlook is promising. “I hope we are now in the decade of infrastructure,” says Roberto Mendes, chief financial officer of Localiza, a local

car rental company and the largest in Latin America. There is a broad consensus that Brazil needs to advance on the reform path – not least to offset inflationary pressures resulting from the supply side bottlenecks – by tackling structural issues such as infrastructure, but also education and the lack of skilled labor. Indeed, addressing old bottlenecks and boosting productivity would do the Brazilian economy a lot of good. The Rousseff government has already lowered

the payroll tax in several industries and pledged to do more in the coming weeks. More elements of tax reform may follow, however piecemeal they may come. The road, no doubt, will be rocky. But as long as the central bank can be firm against inflation, the Brazilian economy may well emerge stronger. “Of course we do have challenges, but I’m confident that there is no way the Brazilian macro policy could think of abandoning price stability,” says Coutinho.LF

November/December 2012

LatinFinance 19

Latin Finance - November/December 2012

Table of Contents for the Digital Edition of Latin Finance - November/December 2012