New Developments On Financing Of Infrastructure Projects

The Brazilian government has adopted two important measures by means of federal decrees, both dated April 1st, 2013, in order to facilitate the financing of infrastructure projects in Brazil, namely: (i) Decree 7595/2013 – that reduced to zero the rate of the Brazilian Tax on Exchange Transactions (Imposto sobre Operações de Crédito, Câmbio e Seguro, ou relativas a Títulos ou Valores Mobiliários – IOF) due in connection with these credit transactions1; and (ii) Decree 7696/2013 – that created a new state-owned company called Brazilian Management Agency of Funds and Guarantees (Agência Brasileira Gestora de Fundos e Garantias – ABGF).

According to Decree 7696/2013, ABGF is a public enterprise (empresa pública) to be structured as a corporation (sociedade anônima) linked to the Ministry of Finance, with an indefinite duration. Its sole shareholder will be the Federative Republic of Brazil (the Union). A General Shareholders' Meeting shall be convened for the incorporation of ABGF by the Attorney-General of the National Treasury (Procuradoria-Geral da Fazenda Nacional) pursuant to article 87 of Law No. 6404 of December 15, 1976 (the Brazilian Corporation Law – BCL)2 and its bylaws will be approved in such meeting.
The initial capital stock of ABGF will be R$ 50 million, divided into 50,000 common shares, all registered and without par value. The Finance Minister will designate a representative for the practice of acts necessary for setting up and installing ABGF3.
ABGF aims to have a key role in supporting the provision of guarantees for the large infrastructure concession projects launched by the Brazilian government to boost the economic growth. According to the local newspapers, ABGF should manage funds worth R$ 25 billion, R$ 11 billion for infrastructure financing and R$ 14 billion for foreign trade.
The main investor demand is for credit guarantees for concession of highways and railways. In infrastructure projects guarantees are very important, especially at the beginning of the operation. Such guarantees are required from the time the investor wins the concession and needs to hire a bridge loan to finance the venture up to the effective fundraising in the financial or capital markets. The goal of the Brazil government with the offer of guarantees by ABGF is to give more security to the private sector investments while reducing borrowing costs.
As a result of the reduction to zero of the IOF tax rate, since April 2, 2013 the Brazilian private banks can finance with its own resources infrastructure projects, capital goods, innovation and technology under the same terms and conditions of the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social – BNDES).
In accordance with the provisions of item I of article 1 of Law No. 12096, of November 24, 2009 (Law 12096/2009), as amended by Provisional Measure No. 606, of February 18, 20135, the Union is authorized to grant economic subsidy, under the equalization mode of interest rates (interest equalization), to financing transactions contracted up to December 31, 2013 to BNDES intended for: (a) the acquisition, leasing and production of capital goods, including components and related technology services, and the associated working capital; the production of consumer goods for export; the electric power sector; the export structures of liquid bulks; the engineering projects; to technological innovation; and investment projects for the establishment of technological and productive capacity in knowledge-intensive industries and engineering; and (b) the logistics infrastructure projects directed to highways and railways concessions granted by the federal government. The interest equalization corresponds to the difference between the borrower's final charge and the cost of funding, plus the remuneration due to BNDES and the financial agents accredited by BNDES.
Furthermore, Decree 7975/2013 determines that the IOF tax is reduced to zero for any transaction contracted as from April 2, 2013 by a Brazilian financial institution as lender, either with public or private resources, to finance operations for any of the purposes mentioned in the previous paragraph, in accordance with the criteria lay down by the Brazilian Monetary Council (Conselho Monetário Nacional – CMN) and by the Central Bank of Brazil (Banco Central do Brasil – Bacen).
Before the enactment of Decree 7595/2013, only the funding with public resources, which implied the transfer of funds of BNDES by the lender to the borrower in the capacity of accredited financial agent, was exempt from the IOF tax, and the applicable IOF tax rate to the funding with private resources was 1.5% per annum, plus 0.38% at the time of the contracting of the loan.
The main objective of Decree 7595/2013 is to ensure that the private financial institutions use for this type of funding the compulsory deposit resources that the government released in 2012. It is estimated that the private banks will have approximately R$ 15 billion of compulsory deposit resources to finance long-term investments6
Before the enactment of Decree 7595/2013, only the funding with public resources, which implied the transfer of funds of BNDES by the lender to the borrower in the capacity of accredited financial agent, was exempt from the IOF tax, and the applicable IOF tax rate to the funding with private resources was 1.5% per annum, plus 0.38% at the time of the contracting of the loan.
The main objective of Decree 7595/2013 is to ensure that the private financial institutions use for this type of funding the compulsory deposit resources that the government released in 2012. It is estimated that the private banks will have approximately R$ 15 billion of compulsory deposit resources to finance long-term investments.