Brazil’s decrepit infrastructure is stifling the country’s growth as a major commodities exporter, writes Shannon Manders.
Brazil’s preparations for the 2014 World Cup have been moving forward with alarming passivity. While the actual stadiums will reportedly be ready on time, work is still lagging behind on the vital wider infrastructure.
Much attention has been drawn to the country’s need for ports, airports, roads and rail networks, which will not only ferry football enthusiasts next year, but which are essential to support the export of the country’s commodities.
Brazilian President Dilma Rousseff, who has taken a lot of flak for not continuing the necessary infrastructure reforms initiated by former President Lula, has been increasingly looking to private enterprise to step in to improve public services.
In December she launched a US$26bn investment programme to overhaul and expand the country’s ports; a move that suggests the government has come round to the fact that the private sector is growing tired of waiting for an upgrade to its roads and water routes.
The Logistics Investment Programme for Ports will seek to modernise the management and infrastructure of the country’s ports, and boost the expansion of private investment in the sector. According to a release issued by the government, the plan entails a new regulatory framework and funds will be used to increase access and entry to the ports and improve planning capacity.
Also earmarked for investment is US$1.25bn for waterway, road and railway access and for the shipyards at Brazil’s 18 ports. Of this amount, US$481mn will be funded by Brazil’s ministry of transport, with the remaining financing set to be raised from Brazilian states and the private sector.
The new measures follow the launch of the roads and railways investment programme in August 2012, which will seek to provide Brazil with an updated transportation system. “Applying an investment model that favours partnerships between the public and private sectors, this initiative will award concession contracts for highway projects and establish public-private partnerships for railway projects,” says a government release.
But industry experts question whether these programmes will provide the necessary boost for the country’s ailing infrastructure.
“Although Provisional Measure 595 [which seeks to increase private partnership] is a good measure, it is not enough as there are other bottlenecks to be handled,” says Angela Martins, managing director at Banco Pine in Brazil. Among the various challenges hindering the industry, she lists the inefficiency of the Docas companies, which are responsible for the loading and unloading of goods at the ports, as well as the integration of the several different means of transportation used to route the goods to the ports.
“Add to that the fact that the government will also have to regulate the construction of the private terminals that are now permitted to handle third party loads, which will be quite a challenge,” she says.
What’s more, exactly how long these projects will take to come on stream remains to be seen. Brazil’s track record with such initiatives would suggest that it may take some time. Four years ago the government announced plans to develop a high-speed rail project that would link the cities of Rio de Janeiro and Sao Paulo in time for the 2014 World Cup.
Fast-forward three botched attempts at a bidding process – all of which were declared void – to August 2012, when the government proclaimed the revival of the US$16.5bn project. The completion date has now been pushed back to 2020.
This time around, the government has set more attractive and less risky terms in a bid to attract international investors, who weren’t keen to get involved in previous rounds because they had been expected to take on the risk of the civil works.
In mid December, Brazil’s National Transport Agency opened bidding for firms wanting to operate and maintain the rail line. The closing date for proposals is set for August 13, 2013, after which an auction will be held to select the winner.
The tender includes the operation and maintenance of the route for the next 40 years, as well as the installation of soundproofing, electrification, telecommunications, signalling and train control systems.
According to local press, companies from as far afield as South Korea, France, Spain, Japan and Germany have thus far shown interest in the project.
Although one would expect banks operating in Brazil to be pleased at the prospect of new opportunities for investment, it seems that an infrastructure frenzy in Brazil does not always translate into business – or financing of business.
“It is more difficult to find assets than funding,” agrees Martins at Pine.
The Brazilian development bank BNDES continues to commit the lion’s share of infrastructure investments in the country. For doing so, it has often come under attack by private investors who believe that the bank is undercutting the market, leaving no room for commercial financial institutions to get involved.
“BNDES is not used to sharing deals with other institutions because they demand 100% of the guarantees for themselves,” says Martins, though she notes a transformation in the way that the bank is operating.
“This is starting to change, and we can already see some efforts to partner with multilateral institutions and other development banks. But it is still a process that is in the very beginning. Partnership with commercial banks will be a later step,” she adds.
Banks jostle for business
Although talk about infrastructure financing has become increasingly prevalent, Brazil’s agribusiness remains the core industry for many trade finance institutions.
Banks around the world are sitting up and taking notice of the opportunities that business in Brazil brings, and Asian banks are currently leading the charge in setting up in-country operations.
In December, Brazil’s central bank gave the Industrial & Commercial Bank of China (ICBC) authorisation to operate a broad banking licence in Brazil. An announcement by ICBC stated that it plans to launch with US$100mn of capital, and intends to work with Chinese players with business in Brazil.
As GTR went to press, Mizuho Financial Group was in the process of finalising its purchase of Banco WestLb do Brasil.
Another Japanese bank looking to Brazil’s higher-yielding markets is Bank of Tokyo-Mitsubishi UFJ (BTMU).
Erich Michel, managing director, head of structured trade finance for the Americas tells GTR that BTMU is building up its presence in Brazil and has doubled its staff over the last year. In agribusiness specifically, under the leadership of Jose Stamato Neto, the bank is looking to branch out and venture into new products and customer segments.
“Over the last year, we’ve done well. We’ve identified some good opportunities and built up a fairly strong base. We’ve also been working on a plan to make this a core business for the bank,” Michel says.
The bank recently participated in a club deal for a pre-export facility with coffee co-operative Cooxupe. Michel explains that the transaction was structured using an NCE – a local debt instrument linked to exports, as the deal was closed during the time that the central bank had heavily restricted pre-export finance facilities by foreign banks to Brazilian exporters.
Among other deals closed in 2012, Michel highlights a bilateral facility to sugar mill Usina de Açucar Santa Terezinha, and a transaction for Amaggi International, which was closed as a derivative embedded pre-export structure.
Brazil represents an important growth market for both Chinese and Japanese banks, but Michel explains that there is a difference in the countries’ approaches.
“The Japanese are building up a presence; they have more of a level of comfort because of their history in the country. The Chinese are coming at it in a different way. They are looking to lock in large contracts to, for instance, secure their future flow of crude by fulfilling corporates’ capex needs. They are strategically approaching certain producers of natural resources with big contracts and offerings.”
As evidence of this strategy, Bank of China recently closed a US$1bn seven-year bilateral deal with state oil company Petrobras.
“This is quite significant, but also means that so far their focus is on top names in the industry,” a Brazilian trade financier tells GTR.
In addition to new players, other international banks that were historically aggressive in Brazil are returning to the market.
ABN Amro, which was sold and carved up in 2007, bought Brazilian bank CR2 in October last year, and in the process has set itself up to acquire a banking licence in the region.
ING too is making inroads into the market: in 2011 it set up a structured metals and energy finance team, headed by Eddy Leiber-Faller and Marcel Abbate. Cristina Herz and Laura Johnson joined the team in January 2013, both transferring from the bank’s client coverage team.