This content is from: Local Insights

Colombia: Internationalising capital markets

Luis Gabriel MorcilloMaría Camila Ordoñez

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

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