New Developments On Financing Of Infrastructure Projects In Brazil

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...