|Private equity and infrastructure|
Brazil is under pressure to develop, and the good news is that the regulatory environment is favorable to foreign investment
As has been discussed for some time, Brazil still faces a major challenge in the infrastructure area. It is necessary to focus on several sectors to support the pattern of growth and development of the country, especially ports, airports, railways and energy.
Specifically in transportation, the government is making enormous efforts to change the existing matrix, consisting mostly of highways and to a lesser extent, railways. Many of the highways linking the various regions are in poor condition, and a significant share of production is transported on an outdated fleet. This situation creates high cost and a constraint on economic growth and lack of competitiveness in international markets. The greatest challenge lies in the improvement of existing railways and the improvement and expansion of the quantity of highways, in addition to making investment viable in waterways and air transport.
There are also challenges in the oil and gas sector. Reserves already discovered still need infrastructure to enable the development of their full productive potential. In the energy area, it is necessary to expand systemic capacity to be able to sustain the growth of economic activity in the coming years.
In addition to all the challenges in the area of infrastructure to support the sustainable development of the country, there are also the mega-events of the World Cup of 2014 and the 2016 Olympics, which themselves will require considerable investment in infrastructure.
All these projects will require a capacity for massive funding not only from the BNDES, but also from other national and foreign, public and private financial institutions, and multilateral agencies, all in coordination with private investors.
The scenario described is undoubtedly favourable to foreign investment. And a part of this contribution will certainly be made through private equity. One point that tends to attract foreign investment in the form of private equity is the established legal environment, consistent and stable, which ensures a reasonable level of predictability for investors.
Brazil is already experiencing an inflow of investments from some private equity funds focused exclusively on infrastructure projects. The main debates about private equity investments in this area are related to longer-term disinvestment and risks related to greenfield projects.
Private investors in infrastructure in Brazil should have the ability to foresee specific issues such as required licenses, regulatory requirements, questioning from state prosecutors and NGOs, and possible setbacks related to the tenor and content of the project.
Some of these risks can be mitigated by a thorough due diligence on the structure and the regulatory requirements of the project, and by specifying the structure of disbursement of fund, always linking it to the achievement of certain milestones. Another solution is the inclusion of provisions in the contract enabling the investor to sell shares to other investors or a more favorable distribution of dividends after a certain period of time.
Although Brazil is under strong pressure to develop structures and solutions to finance its infrastructure, the regulatory environment is favourable for investment in the form of private equity.