In November 2015, the Brazilian National Monetary Council
issued Resolutions 4444 and 4449 with the goal of attracting
investments from insurance and local reinsurance companies,
pension funds and capitalisation companies (institutional
investors) to infrastructure projects.
The most significant regulatory change was the move to
increase the limit of investments that institutional investors
may direct to so-called infrastructure debentures. These are
local bonds issued by companies acting in the energy and
infrastructure sectors, whose proceeds must be directed to
specific projects (like project bonds). Proceeds from these
bonds earned by legal entities are subject to a withholding tax
of 15%, but no other taxes. This makes their total tax cost
lower than the cost of other debt securities.
Lack of proper infrastructure is one of the main obstacles
to Brazilian economic growth. According to the World Economic
Forum, investments in infrastructure projects in Brazil will
reach $1.2 trillion (approximately R$4.8 trillion) in the next
10 years. Recent research shows that local bonds, in general,
accounted for only 19.6% of investment in infrastructure
projects in Brazil over the last three years. Forty percent of
this came from institutional investors. This is the result of
lower long-term interest rates offered by public banks to
infrastructure projects. These banks, however, will not be able
to finance all the capital needs of such projects.
In November 2015, institutional investors had R$631 billion
in assets, of which R$467 billion was held by pension funds
alone. The regulatory change is an effort by the government to
nudge these funds into supplementing the public banks' funding.
It was prompted by the widespread belief that institutional
investors will strengthen their participation in infrastructure
funding in Brazil – as has also been the case in other
countries. Increased participation from institutional investors
in infrastructure investment would also reduce pressure on the
federal government's budget.
The new regulation establishes that infrastructure
debentures secured by government bonds that represent at least,
30% of the principal amount are now subject to specific and
more advantageous investment limits. Notwithstanding the
specific restrictions set out for each type of issuer, the new
rules extend the limit for investment in these bonds by pension
funds from 70% to up to 80% of the total amount allowed for
investments in the fixed-income segment. For insurance, local
reinsurance and capitalisation companies, the investment limit
allowed in this category is now up to 75% (up from a previous
limit of 25%).
With this new regulation, the federal government is
continuing its plan to attract new capital providers to local
infrastructure companies, and, in so doing to reduce its role
as the main financier of such sectors, especially given its
current budgetary constraints.
Maurício Santos and Betina Sanglard