Considering the recent environmental disaster in Rio Grande do Sul, one wonders how the restoration and restructuring of this State will be carried out, especially of the structures that serve the entire population in the various areas.
In Brazil, infrastructure financing can be performed in several ways, using both public and private funds, which covers the following lines:
GOVERNMENT BUDGET:
• Government Direct Investments: The federal, state and municipal government allocate a portion of the budget to infrastructure projects, such as road construction, hospitals, schools, among others;
• Parliamentary Amendments: Deputies and senators can allocate specific funds to infrastructure projects in their regions of operation.
GOVERNMENT LOANS AND FINANCING:
• BNDES (Brazilian Development Bank): Provides credit facilities with special conditions for infrastructure projects;
• Caixa Econômica Federal: Funds infrastructure works, especially in areas such as sanitation and housing;
• Banco do Brasil: Offers credit facilities for various types of infrastructure projects.
PUBLIC-PRIVATE PARTNERSHIPS (PPPs):
• Concessions: The government warrants private companies with the right to exploit certain services or infrastructures, such as roadways, airports, and ports, through a contract that sets forth the investments to be made and the compensation for the provision of services;
• PPP Lines: These include BOT (Build-Operate-Transfer), where the private company builds, operates for a certain time, and then transfers the development to the government, and BOO (Build-Own-Operate), where the company builds, operates, and holds the property developed.
INTERNATIONAL ORGANIZATIONS AND MULTILATERAL DEVELOPMENT BANKS:
• World Bank: Provides loans and technical assistance for infrastructure projects;
• Inter-American Development Bank (IDB): Provides financing and support for infrastructure development;
• New Development Bank (NDB): Created by the BRICS countries, it also offers financing for infrastructure projects.
TAX INCENTIVES AND SUBSIDIZED CREDIT FACILITIES:
• Special Incentive Regime for Infrastructure Development (REIDI): Grants tax advantages to companies that invest in infrastructure, such as the suspension of PIS/Pasep and Cofins taxes;
• Proinfra (Infrastructure Program): Provides subsidized credit facilities for infrastructure projects in priority sectors.
CROWDFUNDING:
• Crowdfunding Platforms: Efforts that allow fundraising directly from the wider population for specific infrastructure projects, although it is still a less common model in Brazil.
CAPITAL MARKET:
• Infrastructure Investment Funds (FI-Infra): Funds that raise contributions from investors to infrastructure projects, offering a return based on the performance of these projects;
• Infrastructure Debentures: Debt instruments issued by companies or SPE’s (Special Purpose Entities) that aim to raise funds for infrastructure projects. These instruments provide tax incentives to attract investors.
From what can be seen, there are several ways to finance infrastructure projects in Brazil, and in this article the so-called Infrastructure Debentures will be further addressed. Their regulation has been improved by Law 14801/24 and Decree 11964/24.
Infrastructure debentures are financial instruments issued by companies to raise funds for infrastructure projects, such as roadways, railways, ports, airports, electricity, and basic sanitation. These corporate debt instruments have stood out in the Brazilian market for offering advantages for both investors and issuing companies and for the country’s economic development.
Debentures are issued by private companies or public utilities, and represent a loan that the investors make to companies, which undertake to pay periodic interest and return the principal on the maturity date.
In the case of infrastructure debentures, the funds raised should be allocated to specific projects in this sector, which, however, although it has not gained traction in Brazil even after the changes introduced by Law 14801/24 and Decree 11.964/24, a scenario that will certainly change given the benefits inherent in the use of such a way of obtaining credit.
While on the subject, one of the main advantages of infrastructure debentures is the tax incentive, providing that the income from these instruments is exempt from Income Tax for individuals and for some institutional investors, such as pension funds.
This exemption increases the investment’s attractiveness, resulting in a greater volume of resources earmarked to projects that are capital for the country’s development.
Infrastructure debentures typically have longer terms, reflecting the nature of the projects they finance, which usually have long maturity periods.
Profitability can be fixed, floating (indexed to indicators such as IPCA or CDI) or hybrid. The combination of long terms and tax incentives can provide attractive returns for conservative and long-term investors.
Here are some advantages for market players resorting to this financial instrument:
FOR INVESTORS:
• Tax Exemption: Income Tax exemption on revenue is one of the main stimuli;
• Portfolio Diversification: They allow a diversification option in key industries of high economic relevance;
• Competitive Profitability: They can provide higher yields than government bonds, especially when considering tax incentives.
FOR ISSUING COMPANIES:
• Cost of Capital: They have access to funds at a lower cost compared to other forms of financing;
• Flexibility: Possibility of structuring debentures according to project needs, in terms of payment terms and conditions.
FOR ECONOMIC DEVELOPMENT:
• Infrastructure: They enable projects that are pivotal for the country’s economic and social development;
• Employment and Growth: They contribute to job creation and economic growth through improved infrastructure.
Despite the advantages, infrastructure debentures also imply risks that should be considered by investors:
• Credit Risk: The risk of default of the issuing company, which may not be able to meet interest and principal payments;
• Liquidity Risk: In some cases, there may be difficulty in selling the debentures on the secondary market before maturity;
• Market Risk: Fluctuations in interest rates and inflation can affect the profitability of bonds, especially long-term ones.
From what can be seen, infrastructure debentures represent an interesting alternative for investors seeking diversification, tax exemption, and attractive returns, while contributing to the development of the country, besides standing as an advantageous and viable tool for the reconstruction of several cities in Rio Grande do Sul that have been devastated by the tragedy.
For investors, thoroughly assessing the associated risks and the issuing company’s ability to meet its financial obligations is a necessity. With thoughtful analysis and a well-defined strategy, these instruments can be a valuable addition to an investment portfolio!
Autor: Edyen Valente Calepis • email: edyen@ernestoborges.com.br • Tel.: +55 67 3389 0123
