Letter IEDI n. 867–Recommendations for infrastructure investment to bounce back
Socio-economic development requires investments that foster the increase of productive capacity, innovation, productivity and job creation. Unlike most fields of the economy, infrastructure investments contribute to generate these effects, which are essential to economic progress. In the Brazilian case, a very important issue is present: the country's deficiencies in this sector are enormous and the problems to be solved are urgent. Therefore, there is a large avenue to be trodden with great potential to leverage national growth.
Even though it is a top priority, infrastructure progress has been slow and has encountered significant challenges. This Letter IEDI seeks to contribute to the construction of solutions to the problem of infrastructure in the country. For this, it summarizes the main arguments and propositions of a study by Daniel Keller, IEDI consultant, Igor Rocha, PhD in Economics at the University of Cambridge, and Venilton Tadini, President of ABDIB, whose full version is available on our website (in Portuguese). This study is part of a series of works carried out to support the elaboration of the IEDI's industrial strategy.
Among the recommendations that gained prominence throughout the analysis, we selected nine topics that deserve to be emphasized:
1. The reduction of the Brazilian base interest rate —as well as the consolidation of real rates at levels closer to international standards— will be an important factor for the development of both long-term bank credit and the capital market, benefiting infrastructure.
2. While this process is not complete, it is necessary to maintain incentives for the development of capital markets, such as exemption from income tax for infrastructure debentures, BNDES' purchases of subordinated quotas of debentures and improvement of secondary markets for the so called "incentive securities" (which receive tax benefits).
3. Also relevant are measures like circumscribing regulatory activity to regulatory agencies only and defining limits for the agencies' control and technical improvement. Bill 7448/2017 has contributions in this regard.
4. Structuring of guarantees against the risk of exchange-rate variation for operations to raise foreign funds. This risk is associated to possible changes in international financial flows and the chance of foreign banks entering the Brazilian market.
5. Directing the actions of the BNDES and development banks to the mitigation of current private credit restrictions and to support concession projects, including the following points: i) enabling project finance loans on a non-recourse basis; ii) increasing the flexibility of credit lines with greater disbursements for working capital (longer terms and competitive rates) and bridge loans; iii) creation and use of guarantee funds; (iv) acceptance of various types of guarantees; v) possibility of guarantees’ sharing by the development banks, especially in the case of incentive debentures; vi) customization of financial covenants, seeking to increase project leverage (DSCR can vary between 1.0 and 1.2 in the first years of the projects).
6. Promoting the development of an insurance-guarantee market (especially performance bonds) for infrastructure concessions in order to mitigate or eliminate the risks associated to construction.
7. Supporting the renegotiation or sale of concession contracts so that projects already granted become viable.
8. Assisting the elaboration of studies and concession projects with incentives to the Declaration of Private Interest (MIP, the acronym in Portuguese) and the Procedure for Declaration of Interest (PMI), as well as the participation of associations (Abdib in the case of public lighting).
9. Giving incentives to the release of credit for companies pending judicial proceedings, provided that the guarantees' conditions are met.