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Infrastructure debentures in Brazil

As anyone who knows Brazil is aware, one of the main bottlenecks for its economic development is the state of the infrastructure in the country

Antonio Felix de Araujo Cintra
As anyone who knows Brazil is aware, one of the main bottlenecks for its economic development is the state of the infrastructure in the country. Ports and airports, roads and railways, power generation, and water and waste management are all in need of urgent upgrades if Brazil is to continue moving forward in its growth drive.

So far, infrastructure projects have been financed mainly by loans provided by BNDES, the huge state-owned development bank, by capital markets transactions funded by FI-FGTS, an investment fund funded by a portion of the government-managed mandatory severance funds of Brazilian employees, and by the odd loan from multilateral financial institutions such as the IFC and IADB.

Capital markets alternatives have been conspicuously absent from the mix, except for short-term bridge-financing promissory notes.

Finally the Brazilian government is working to provide alternatives. One such alternative was implemented by Federal Law 12,431/11, which created so-called infrastructure debentures.

The law has granted a tax benefit in connection with the income paid by infrastructure debentures: the income paid to individuals with be subject to a zero tax rate while for legal entities the rate will be 15%. To qualify for such tax benefits, the infrastructure debentures will have to be issued by special purpose companies created to implement infrastructure projects, or of projects of intensive economic production in research, development and innovation. Such projects must be declared as a priority by the federal government. The tax benefit will only apply to debentures issued up to December 31 2015.

Only projects in the sectors of logistics and transportation, urban mobility, energy, telecoms, sanitation and irrigation will qualify for these tax benefits. For that purpose, the relevant projects will have to be approved by the appropriate Ministry. If the projects are not implemented, the government may impose a fine to the project company and its shareholders in an amount equivalent to 20% of the total amount of the issued debentures.

The tax benefit granted to the investors in infrastructure debentures may be an important incentive for companies to access such market to fund their projects, because such incentives may enable a relevant reduction in the interest rates payable thereunder by the project companies.

However, despite having been created more than a year ago, in June 2011, so far no public infrastructure debentures have been issued in the Brazilian market. One problem is the fact that the Ministries are still defining the criteria for the evaluation of projects that may be considered a priority. In addition, it seems that, at least in one concrete case, the main obstacle for the use of such instrument is the uncertainty as to the use of the infrastructure debentures to take out a bridge financing that had already been incurred by the project company.

After a great deal of discussion in the market, there are rumours that the government is preparing a revision of the regulations to create some more flexible rules. Among such new expected rules is the possibility of repayment of bridge loans with the proceeds of the debentures.

Once these issues are solved it is expected that the use of infrastructure debentures to finance new projects will increase substantially. It can only be hoped that this helps Brazil finally to take its infrastructure to a level that is more compatible with its ambitious development objectives.

Antonio Felix de Araujo Cintra

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