Capital markets to become instruments for investing in Brazilian infrastructure projects
Investing in infrastructure in Brazil involves long term risks. Regulation is intricate, currency exchange is volatile, the political and institutional environment may not offer much certainty. Notwithstanding, capital markets can play a central role for new infrastructure projects thanks to recent changes in the regulatory framework and tax benefits.
Brazil’s sustainable development, economic growth and increased competitiveness are highly dependent upon investments to tackle the infrastructure bottleneck. The economic policy of the current administration seems to rely on lower interest rates, tightening fiscal policy and less subsidized loans, such as those granted by the National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social - BNDES), creating room for new sources of investment and other structured alternatives.
In these circumstances the Brazilian Securities Commission (Comissão de Valores Mobiliários – CVM) has recently issued a rule for Incentivized Infrastructure Investment Funds (FI-Infra) and Investment Funds in Shares of Incentivized Infrastructure Investment Funds (FIC-FI-Infra). The regulation creates an advantage for such funds in comparison to conventional funds.
In the case of funds distributed to unsophisticated investors, the new rule allows for the allocation of up to 20% of the fund’s net worth to one single infrastructure project. This compares to conventional funds, where such limit is generally 5% in relation to a single issuer. Additionally, qualified investors are now authorized to allocate twice as much as retail investors to one single infrastructure project, and professional investors have no such limitation. These changes increase the ability of infrastructure projects to raise capital through investment funds.
In addition, a set of fiscal benefits for securities related to infrastructure is in place to benefit those to be issued until the end of 2030. The income tax-free policy for foreign investments in debentures, certificates of real estate receivables and in Receivables Investment Funds (FIDC) is limited by some pre-requisites imposed by law to public offers, such as pre-fixed interest rates and prohibition of repurchases. Tax benefits also apply specifically to investments in securities issued by special purpose companies engaged in infrastructure projects – in this case, both resident investors and foreign investments in local funds allocating a minimum amount of their net worth in such assets are contemplated.
Logistics and transport, urban mobility, energy, telecommunications, water and basic sanitation are amongst the priority sectors that can gain from these fiscal benefits.
In regards to the pre-requisite imposed by law for new public offers, the government has been persuaded by market representatives to take the opportunity to work on an update for the rules for pre-fixed interest rates and repurchases of public offers made in 2011 or 2012 due to a sharp decline in the basic interest rates since then.