According to Prof. Luciano Coutinho, President of BNDES (Brazil’s development bank), lack of trust in the market made Brazilian investors addicted to short-term and liquid assets, particularly treasuries. “In these conditions, the issuance of long-term private financial instruments was virtually impossible,” he noted.
Fixing the fundamentals
Starting with the Real Plan in 1994, the country has enjoyed growing economic, fiscal and price stability which paved the road for the development of a long-term debt and equity investment market. At the same time, Brazil started to impose longer terms on government treasuries which – combined with strength in the stock markets – brought about a more favorable climate for a private bond market oriented towards longer-term financing.
“The government has taken measures to encourage development in this market,” noted Prof. Coutinho. “One of the most important initiatives was the creation of infrastructure bonds that gave tax exemptions to foreign investors on income earned from infrastructure projects. The expectation is that these instruments will help share the burden of long-term financing needs between the investors and BNDES.”
Accelerating project implementation
For their part, BNDES is already deeply engaged in developing the long-term fixed income market. Part of this strategy involves enhancing the bank’s ability to stimulate investors to make use of some of the market’s complementary market instruments. At the same time, BNDES is leveraging decades of experience in project finance and implementation which should prove invaluable to interested foreign investors.
“In the last five years alone, BNDES has disbursed more than USD80 billion across more than 350 infrastructure projects in Brazil. We need to be sharing this expertise in project financing with the market,” suggested Prof. Coutinho. “Over the course of six decades, the bank has acquired state-of-the-art insight into the legal, technical and financial practices that could help accelerate the implementation of complex financing arrangements.”
Catalyzing the market
To better galvanize the market, BNDES is now focused on helping the country achieve sustainable economic growth by raising Brazil’s aggregate investment to Gross Domestic Product (GDP) ratio and promoting the country’s industrial competitiveness. As the ratio increases, BNDES will work to bring new sources of long-term financing to the market. “Brazil needs additional domestic and foreign financial savings to boost the enlargement of our capital market,” added Prof. Coutinho.
Prof. Coutinho also points to the recent Logistics Investment Program (PIL) initiated by President Roussef which aims to secure around USD20 billion in infrastructure investments over the next five years. “The range of investment opportunities presented by the government makes it clear that Brazil has sound and important investment projects to offer the international community,” noted Prof. Coutinho. “Already, investors are showing growing interest in participating as stock holders or bond holders in these projects.”
Some work still remains for Brazil and BNDES. In particular, Prof. Coutinho suggests that improvements still need to be made with respect to financial guarantees such as better performance and completion bonds or the enhancement of guarantees for non-manageable project risks. The bank also plans to help create a larger and deeper secondary market for infrastructure bonds and securitized investment funds.
“We expect that these will either be induced by the government or – preferably – will spontaneously appear as Brazil’s infrastructure market picks up speed and matures.”
Lessons from an emerging market leader
Based on his experience leading BNDES, Prof. Coutinho offers five points of advice for other emerging market development banks and governments seeking to attract foreign investors to infrastructure projects.
First, Prof. Coutinho suggests that emerging market governments assess the strength of their own market in terms of the underlying institutional frameworks, the robustness of the legal system, the transparency of the procurement process, government sponsorship and the quality of the deal pipeline. “All of these must be consistent with the aims of long-term planning as carried out by public institutions,” added Prof. Coutinho.
Emerging markets will also need to create a framework for Public Private Partnerships (PPPs) that engenders transparency and provides a sound rating evaluation across all different stages of infrastructure project development, in order to provide investors with confidence in their investment decisions and ongoing evaluation.
Foreign investors also want to choose from a selection of suitable assets such as purchasing debt or equity from special purpose companies, equity issuances for listed companies or offers of infrastructure bonds. “There is clearly a need to offer investors a variety of financial instruments and terms that might be more suitable for their portfolios.”
Prof. Coutinho also suggests that emerging market governments focus on encouraging the banking sector and development institutions to gain greater capabilities in structuring project finance and supplying long-term credit and capital with appropriates costs, terms and durations.
The President of BNDES also has some advice for foreign investors seeking new opportunities in emerging markets. “Whether you are a developer, an institutional investor or an asset manager, it is essential to be in the country for some time to understand the local financial, regulatory and investments conditions,” suggests Prof. Coutinho. “Partnerships with local firms and advisory counsel from banks and/or consultants are highly recommended.”