Ministry of Finance Brazil Private Participation in Infrastructure November 2014 Introductory Remarks • It has been recognized that increasing investment in infrastructure should be a mean to propup long term growth and to tackle the current economic slack (IMF’s WEO, fall 2014) • In medium-income countries such as Brazil it is about filling the infrastructure gap • In low-income countries the challenge is to overcome the “bring-your-own-infrastructure” barrier to investments • Infrastructure is also a way of reducing inequality, as it affects disproportionally the poor • One condition for infrastructure to lead to higher growth is efficient implementation • Traditional forms of contracting might be inefficient as they transfer too much risk to the government and fail to keep adequate maintenance • Private participation forms of contracting are regarded as more efficient for large-scale projects, but there are challenges • I will raise some issues drawn from the Brazilian experience Private Participation in Infrastructure – investment commitments Brazil has a well established tradition in PPI, being a leading country in the developing world in such form of contracting. Its experience can be valuable to other countries as it varies widely across regions and levels of government. In current USD billion, by type Values accumulated over 1990 – 2012 energy, telecom, transport, water and sewerage energy, telecom, transport, water and sewerage 80 70 Greenfield 60 Brazil 20% Divestitures 50 Concessions 40 Others 47% India 15% 30 20 10 Russia 6% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 Source: World Bank and SEAE/MF staff preparation. Mexico 6% China 6% Private Participation in Infrastructure: moving ahead Sectors with higher private participation (e.g. Electricity and Telecom) have achieved better performance, while those with less private participation (e.g. water and sewarege) have lagged behind. There are currently around 100 million people in Brazil without adequate sewer collection and treatment. PPI is making inroads into environment projects such as parks and forest management, as well as hospitals and schools. Access to Selected Utility Services (% of households) 1995 2005 2012 Eletricity 91.8 97.2 99.5 Telephone (fixed or mobile) 22.4 71.6 91.2 Water supply 76.3 79.7 84.4 Sewerage 39.7 48.1 57.1 Source: PNAD and SEAE/MF staff preparation. Funding Infrastructure: moving away from traditional sources Fiscal constraints is limiting the participation of public banks. Basel III is limiting the participation of private banks. Policies were put in place to develop capital markets through tax breaks as a mean to complement infrastructure funding. However this option brings many challenges as risk mitigation and allocation is much more complex. Capital Markets Bond Market: Infrastructure Bonds Infrastructure Funds Securitization Instruments Banking Private Banks Infrastructure Projects Public Banks Equity and Private Equity Funds Multilateral Instituions Support Private Participation is No Panacea Cash Flow Profile Construction Phase Greater Risk 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Performance Phase Less Risk • Infrastructure investments are generally large and capital intensive; • They have significant up-front costs, but economic benefits and returns accrue over many years; • In order to attract private financing and sponsors risks have to be adequately mitigated and allocated • This involves complex and time consuming preparation that requires highly qualified bureaucracy that is small or nonexistent in weak institutional environments (i.e. some states and municipalities in Brazil) • Adequate regulation during the performance phase is necessary since these projects are natural monopolies – also weak or nonexistent in many regions or countries. Thank You Pablo Fonseca P. dos Santos [email protected] www.seae.fazenda.gov.br