Brazil electricity reform could 'spark a revolution'

Project finance in Brazil is likely to flourish next year as winners of concessions seek funds. Although electric power remains the most active sector, infrastructure – mainly highways and water and sanitation – is gaining steam. 

The eyes of investors will also focus on regulatory changes expected under a new congress, particularly the opening of the free power market.

Marcelo Girão, head of project finance at Itaú BBA, the investment arm of Brazilian banking giant Itaú Unibanco, talked with BNamericas about the 2023 outlook.

BNamericas: How was the performance of Itaú's project finance area during 2022?

Girão: We always have to remember that the nature of the project finance business involves long-term operations, which means that financing operations that were concluded in 2022 refer to projects generated in previous years.

In general, the year was positive, with power generation and transmission, due to robust regulation, being the most prominent segments.

What we’ve seen, a trend confirmed during 2022, is that within the infrastructure sector the relative advantage of the electricity segment in relation to project finance operations has been diminishing and I would say sanitation and highways have become more important, although airports, ports and railroads have also been significant.

Specifically in highways and sanitation, we’ve worked both as a project financier and as an adviser in auctions and operations.

BNamericas: What are the expectations for 2023?

Girão: We’re still likely before the end of this year to have the auction for the privatization of Corsan and the portfolio for 2023 is interesting, since road projects already auctioned, as well as sanitation projects, from next year will start to close financing.

Among these already contracted projects are the investments in the Dutra highway, won by CCR, the contracts won by Ecorodovias, and also Aegea's investments in the sanitation area in Rio de Janeiro.

Alongside the sectors I’ve already mentioned, project finance operations will also tend to become more important for the telecommunications sector, all projects related to datacenters, towers and fiber optics. The volume of capex for these projects is not as large as in other areas, but the number of operations is significant.

BNamericas: 2023 will start with a new president. What are the potential impacts on the infrastructure sector?

Girão: Infrastructure in Brazil still has such large shortfalls that no matter who is in government, investments in the sector will tend to be a priority.

Our expectation is that investments in infrastructure will remain heated due to the concession plans. But yes, like every year of government transition, there may be a reassessment of some specific points, but the need for investment is so great that the agenda will tend to continue.

For 2023 we have high expectations of project finance operations for electricity transmission auctions and also for state and federal highway concession auctions, with the auctions taking place, pointing to the generation of new project finance operations for the coming years.

The public budget is relatively limited to fill this infrastructure gap, so the government tends to maximize the use of the public budget by structuring projects that attract private capital to make the projects viable.

BNamericas: The oil and gas sector, especially FPSOs, is significant for some banks. What are the prospects for this segment, given that a new government may change some policies for building FPSOs and could favor local production?

Girão: In the oil and gas sector, we have had little activity in financing vessels. Some of these projects are financed using foreign currency and as our funding is in local currency, we are less competitive in this modality.

That said, our focus in this sector is more on the upstream, where we evaluate financing operations for independent oil and gas companies. But all operations in this segment are viewed with great attention from our side, because of all our obligations with regard to reducing greenhouse emissions that we have in the operations we participate in.

BNamericas: Talking about the regulatory agenda for next year, what are the points that you are going to monitor more closely?

Girão: We are attentive to the reform of the electricity sector, which has already been discussed for some time and seems to me to be at a mature stage for voting [by congress]. This reform, if it happens, will likely spark a revolution in the electricity sector.

Currently, the sector is focused on long-term contract auctions and many of the financed projects are backed by these contracts.

Now what is under discussion is the opening of this market so that retail consumers can also choose to buy energy in the free market. This will be transformative for the dynamics of the sector.

We already see a migration of investment from the regulated market to the free market and by opening this sector even more, there will be even greater movement.

On the sanitation side, we should also have some improvements in regulation.

BNamericas: How do high interest rates today affect companies' financing strategies?

Girão: The cost of capital is very important in relation to the return on projects. But there is one [other] aspect that’s important to mention.

For infrastructure companies, revenues and cash generation are indexed to inflation, so the financial cost for these companies is not at the level of nominal interest rates, but of real interest rates.

So we can say that the interest rate increase for companies in recent years was not from 2% to 13.75%, which is how much the [benchmark] Selic rose, but I would say that it was an increase of between 150 and 300 basis points.

That said, companies are keen to follow the fiscal outlook under the new government, and the trend is that interest rates will start to fall in the second half of 2023. But even with high interest rates, there’s always financing and investment ready to be made for good projects.