Turning The Page On Lava Jato: Brazil's New Market-Based Approach To Infrastructure

New Opportunities for International Participants in Brazilian Infrastructure Development

Earlier this month, Brazil's President Michel Temer launched a new phase of Brazil's infrastructure concessions program, called the Investment Partnerships Program (Programa de Parcerias de Investimentos; "PPI"). The new program is driven by several key considerations:

Brazil is struggling to emerge from its worst-ever recession Brazil has suffered (at many levels) from the Lava Jato ("Car Wash") scandal Brazil needs to address a multitude of needs across its infrastructure sector Brazil is trying to attract both private capital and foreign capital Brazil's local infrastructure "majors" have been caught by the Lava Jato scandal, creating a gap in the infrastructure sector that needs to be filled by foreign participants, with the new PPI being structured specifically to facilitate such foreign participation. President Temer's announcement identified 55 new projects under the program, which added to the list of 35 projects that were designated in 2016. These projects include both greenfield and brownfield projects and comprise the whole range of infrastructure assets, including power generation and transmission/distribution assets, oil & gas infrastructure, roads and highways, cargo port terminals, railways, and airports.

The 2017 announced projects are expected to result in approximately 45 billion reais (approx. $ 14.4 billion USD) in direct investments required for new projects and contracted upgrades to existing (brownfield) projects, as well as create 200,000 direct and indirect jobs.1

The Brazilian government is making project level debt financing available to PPI projects in order to attract foreign investment. The Brazilian Development Bank ("BNDES"), along with Banco do Brasil and Caixa Econômica Federal, will provide up to $5.5 billion USD in funding, and the Workers Compensation Fund will finance up to $3.5 billion USD, in the form of project debentures and commercial loans.2 Access to such financing is conditional upon the project sponsor(s) provision of completion bonds (as security instruments in favor of the Government) in order to guard against construction risk. BNDES will charge 150bp over the bank's long term interest rate, plus an extra spread based on the credit risk of the borrower, and is authorized to fund up to 50% of the project debt depending on the type of project. PPI projects are also required to have a minimum 20% equity investment by the project sponsors.3

1. The Program for Partnerships and Investments (PPI)

   The PPI was adopted into law by the Brazilian Congress in September 2016 (Law No. 13.334 of September 13, 2016, or the "PPI Law"). The PPI Law states that it is created "... to expand and strengthen the interaction between the...