Brazil's lower house approves infra bond bill

Brazil’s lower house approved a bill extending tax breaks for infrastructure financing through issues of bonds known as debentures, a measure expected to boost the local capital market.

Currently, debenture issues provide tax exemptions for individual investors but the new bill extends the benefit to companies that issue such bonds and to investments by pension funds.

The bill’s approval, anticipated by BNamericas in an interview with the proposed legislation’s rapporteur in the lower house, Arnaldo Jardim, now goes to the senate, where its approval is expected in the coming weeks as it faces no opposition. 

"This is a victory for the Brazilian capital market. Individual investors have been investing more and more in infrastructure debentures and this type of issue should become now more and more common with these new rules," José Eduardo Laloni, VP of financial and capital markets association Anbima, told BNamericas.

Debenture issues linked to infrastructure projects amounted to 20bn (US$3.79bn) from January to June this year and totaled 27.8bn reais in 2020, according to the most recent figures from Anbima. 

"This is coming in a period that we need to make urgent investment in infrastructure, investment that Brazil has lacked,” said Jardim in a release.

The bill also provides for a hedging mechanism and protection for international investors from foreign exchange fluctuations.

The proposals come at a time when the capital market is assuming the financing shortfall left by development bank BNDES, which has reduced lending due to a lack of funding and is concentrating on structuring projects.

"BNDES will continue to be an important partner in terms of infrastructure financing, but it no longer needs to be like it was in the past where the bank financed 70%, 80% of projects. With the new rules the capital market can finance most projects," Laloni added.

MORE SECTORS BENEFITED

Infrastructure debentures have been widely used to finance energy, sanitation and transport projects.

Now, the instrument is starting to be used for streetlighting projects and is forecast to become more common due to the proliferation of such projects.

The regional development ministry authorized this week Engie subsidiaries Engie Soluções Cidades Inteligentes e Infraestrutura de Uberlândia and Engie Soluções Cidades Inteligentes e Infraestrutura de Petrolina to raise up to 119.2mn reais via infrastructure debentures to finance its recent PPP contracts.

Of the total to be raised, 91.2mn reais will be used for the streetlighting PPP in Uberlândia city, in Minas Gerais state, and 28mn reais for the PPP in Petrolina, Pernambuco state.

Various cities in Brazil are working with the federal government to structure streetlighting PPPs, as local administrations are looking for private sector support due to fiscal restrictions and have attracted the interest of global companies, and infrastructure debentures are likely to be one of the main financing instruments for such operations.

“We have already successfully implemented this type of operation [approval of infrastructure debenture issues] in other sectors and now we are using it for public lighting. The partnership with the private sector will certainly give more dynamism to the expansion and improvement of the sector," said regional development minister Rogerio Marinho in a release.