Conceptualizing Finance in Brazil
Over the past five years, Brazil has been a preferred destination for billions of dollars of foreign investment. Unfortunately, 85 percent of the total has been limited to speculative capital, or what is denominated “hot money”. Hence, the Brazilian economy is no stranger to foreign finance, but is somewhat skeptical as to its longevity due to the very nature of current capital inflows. Foreign portfolio investment coupled with an acute shortage of local sources of finance has made Brazil a complex environment for long-term capital investment and for project financing.
Certain restrictions are imposed on foreign capital, all of which may be overcome by teaming with local investors or partners. Such partners are plentiful; nevertheless, the selection process must be meticulous.
Brazil is attempting to make up for years of under investment in the environment. Emphasis is being placed on wastewater treatment, landfill, hazardous waste treatment and pollution control projects. It is also understood that the government (at all levels) lacks the funds to finance these projects. Unlike in the past, where the state and municipal governments resorted to state banks for funding, today, most state banks are unable to meet most basic lending demands. This problem is not expected to be solved in the short term. Due to this, an increased number of environmental projects are seeking private sector capital or loans from multilateral development banks (MDBs).
With the recent government stabilization plan, the Plano Real, the Brazilian economy is experiencing a novel situation, where banks must contract and consolidate, since easy money making opportunities based on exorbitant inflation rates have ceased to exist. For many banks, inflationary gains composed up to 40 percent of revenues prior to the Real Plan. This contraction has inevitably pushed up the costs of capital, resulting in an economy with less investment. With current monthly inflation rates stable at 1.5 percent, compared with 50 percent prior to the Plano Real, and, with monthly interest rates averaging 4.5 percent (federal securities yielding 4 percent a month) the capital shortage is worsened. Private investors are reluctant to place their capital in long term projects which have a questionable risk to return ratio, when the option of high real rates with sovereign fixed income securities is available.
Combined, these factors have created a shortage of capital destined for environmental projects. Capital investments and long-term loans are difficult to come by in the Brazilian economy from domestic sources.
Due to the fact that Brazil is not rated as investment grade, big environmental projects have been largely financed by MDBs, the Brazilian National Economic and Social Development Bank (BNDES), and the state banks. These entities have absorbed all country risks in exchange for being given preferred creditor status. Nevertheless, private sector capital will have an enhanced role in financing the country’s environmental projects.
Private-sector project financing has fallen short of expectations due to an inherent problem with risk allocation. In short, private sector capital sources consider projects in non-investment grade countries in Latin America prohibitively risky. Only Chile and Colombia have achieved investment grade ratings. Private investors look unfavorably on future receivables from a state or municipal government without adequate levels of additional guarantees. This hesitancy results from several factors, from end-user delinquency and project risk to country risk, where even sovereign (federal) This has been the proposed solution to the same issue in Mexico. guarantees may not suffice. Both specific project and country risks are amplified when considering the 15- to 30-year time frame for such investments.
These are some of the obstacles to structuring project financing in Brazil. Creativity in developing an appropriate hedging mechanism is needed, and a working model has yet to be created. The absence of a track record for such long-term project financing does create an opportunity for the private sector to take the initiative and tailor a feasible financing formula, bearing in mind that the huge internal rates of return and sheer cash flow streams of many environmental projects provide leeway to elaborate expensive hedging mechanisms.
Exporting to Brazil
Since 1990, Brazil has taken significant steps to foster free trade by reducing import barriers. Up until 1990, imports were subject to high tariff rates and complicated licensing procedures, particularly when similar products were manufactured in the country. Today, tariffs are lower and import licenses are generally granted within five days. Brazil and its Southern Cone Market (MERCOSUL) partners (Argentina, Paraguay, and Uruguay) implemented a common external tariff (CET) on January 1, 1995. The CET currently covers approximately 85 percent of traded products; most of the remaining 15 percent will be incorporated into the CET by 2001, and all will be covered by 2006. The CET tariffs levels range from zero to 20 percent.
Tariffs for environmental equipment range between zero and 20 percent and average 19 percent (the rate applied to incinerators and water elevation pumps, for example). Duties are levied ad valorem on the cost, insurance, and freight (c.i.f.) Cost, Insurance and freight value of the import. The Industrial Products Tax (IPI) is assessed on the c.i.f. value plus tariff duties. An importer is also responsible for the Merchandise Circulation Tax (ICMS), a state government value added tax. The ICMS varies among states, with the predominant rate at 18 percent on the c.i.f. value plus tariff, plus IPI tax. The IPI and the ICMS are paid by domestic producers as well.
A breakdown of the customs charges is as follows: The Merchant Marine Renewal Tax is assessed at 25 percent of ocean freight charges on imports by sea, payable by the importer. In addition to these taxes, the Brazilian Government assesses the following fees: Syndicate Fee -- 2.2 percent of c.i.f. value; Brokerage Fee -- 1 percent of c.i.f. value; Warehouse Tax -- 1 percent of import duty; Fee for Handling Charges -- varies according to the value of the produce from $20 to $100; Administration Commission -- currently fixed at $50; Import License Fee (approximately $100); and Additional Port Taxes -- two fees totaling approximately 3 percent of c.i.f. value. All these figures are estimates.
Customs clearance is often time consuming: hence, contacting a local agent to expedite this is advisable.
All importers and exporters must be registered with SECEX, Brazil’s international trade registry, and a license must be obtained for each import.
A foreign exporter should make certain that the Brazilian importer has provided proper information to permit the submission of necessary information, especially that the importer has made arrangements for the entry of the merchandise into Brazil.
Foreign currency receipts from exports must be cleared within ten days of their arrival in Brazil at an authorized bank.
A floating commercial rate for currency conversions is used for transactions involving international trade, repatriation of capital, and remittances of dividends, profits, and royalties.
The Brazilian tax code was modified in 1991 to eliminate, effective January 1992, the supplementary income tax (surcharge) on foreign profit and dividend remittances that exceed 12 percent of registered capital.
The Brazilian Government encourages direct investment in the country, and special tax advantages are available to those investors willing to invest in the northern regions of the country provided they employ nationals. The specifics of these advantages are assessed on an individual basis, and the petitions must be made to the central government, or to the regional administration.
Securing Export Payments in Brazil
Exporting to developing nations always entails certain risks not usually associated with regular business. This becomes increasingly complex when it comes to extending direct credit or dealing in unfamiliar banking instruments. An exporter must not lose track of standard business practices which are used in the United States while doing business in such countries. In Brazil, certain business practices are commonplace which will seem somewhat peculiar to a person not habituated to operating in the country. It is hence advisable to familiarize oneself with some basic procedures.
Companies may export to Brazil following the import policies dictated by the federal and state governments. For most products, an import license must be issued to the importer before the exporter can ship products to Brazil. Without such a license, the importer is not allowed by law to clear goods from customs and is further prohibited from making any official payment by means of letters of credits.
Regular risks associated with international trade such as currency risks are not hedged using the readily available international instruments such as buying forward contracts of the particular currency in the Chicago Mercantile Exchange for example. Instead, in Brazil, currency risk is hedged simply by stipulating all given values in U.S. dollar terms or by over-the-counter forward contracts. This phenomenon may change in the near future with the sustainability of the stabilization process.
The following are among the payment options open to exporters:
A. Documentary Collection
Standard practice in Brazil is to have the exporter ship the goods and send the documents (bill of lading, etc.) through a merchant bank, where payments must be made to get the original documents from the bank necessary to clear customs. Though simple in nature, this process is very risky since it entails the exporter shipping all the goods before receiving funds or payments. This risk is attributed to the fact that an importer may not have the funds available to release the documents in the first place. Furthermore, this process does not factor in the possibility of the Brazilian Government raising quotas or tariffs on particular classes of goods while those goods are en route. Sudden changes in government policy are uncommon but do occur, as seen in the 1995 incident with automobiles and textiles where import tariffs were doubled overnight. A change such as this could make it impossible for the importer (in good faith) to clear the merchandise, in which case the importer will not make a payment to the bank and does not take on any responsibility for the final payment or for the goods sitting on the dock.
B. Advance Payment
The best manner to secure payment is to receive it in advance. However, in April 1995, the Government of Brazil placed a 20 percent ceiling on advance payments to foreign suppliers in an effort to stem the dollar drain resulting from the Mexico peso crisis of December 1994. The U.S. exporter receives an up-front retainer for production and a subsequent payment upon shipment. This method has the disadvantage of not being client friendly, is not widespread in Brazil, and is not effective in protecting the exporter from risk as only 20 percent of the value of the shipment can be paid in advance.
Until a time tested relationship has been established, an exporter may not want to give direct credit to the Brazilian importing company, though this will frequently be requested. Redress through the Brazilian legal system can be extremely time consuming.
C. Letters of Credit
Obtaining a Letter of Credit is highly recommended; however, it is an expensive method of payment due to high real interest rates in Brazil. It is advised that before undertaking any production, an exporter should receive a letter of credit, or a “Carta de Crédito” for 110 percent of the merchandise value (for insurance) opened by a first class bank. The letter of credit should not have a cancellation clause or be a “standby letter of credit,” and should contain within it the term “irrevocable.” It is recommended that the Letter of Credit also be confirmed by a U.S. bank, especially in light of Brazil’s current banking structure. The exporter must meticulously check the wording within the letter of credit. In terms of insurance, a provision should be made in the favor of the exporter for fire, flood, and war occurrences, as is standard practice.
Payments secured by a Letter of Guarantee, or, “Carta de Fiança” issued by banks are not practiced in Brazil, and may cause many legal complications.
D. State Bank Guarantees
Export of services, such as project consulting, is often guaranteed by state banks. Companies which have exports guaranteed by state banks today must be aware that the majority of the banks are in financial turmoil. Some institutions have declared insolvency and are now seeking federal support, and others are looking to be privatized, such as Banerj, the Rio de Janeiro state bank.
E. Home Country Government Insurance
Government insurance companies such as the Export-Import Bank of the United States do provide export insurance, but the exporter must file for it prior to beginning production. This method is an effective alternative for securing export payments and should be pursued in the absence of effective banking instruments, or when extending direct credit to importers.
Finally, it is imperative to bear in mind that while operating in Brazil, one must not lose sight of the standard business practices that would be adhered to while operating within the United States. Relationship building is still the best way to guarantee payments and further foster trade.
Multilateral Funding Sources
The World Bank has been a major financing source for environmental infrastructure projects in Brazil and around the world. For example, in fiscal 1994, the bank funded 8 projects with primarily environmental objectives involving commitments of $748 million and funded 17 other projects which had significant environmental components.
The bank has been especially active in funding water supply and sewage projects through loans to governments. Bank loans are dispersed both for institutional development and strengthening as well as for financing actual water supply and sewerage systems. For example, a 1994 loan of $154 million was made to help finance the Espirito Santo state water company’s 1994-99 investment program, which will impact 1.2 million people. A 1993 commitment was made to fund about 46 percent of the water quality improvement work for a major portion of the city of Belo Horizonte, Brazil’s third largest city.
World Bank Partial Risk and Credit Guarantee Programs
Point of Contact: M.G. Sri-Ram Aiyer, Director, Technical Department for Latin America and the Caribbean, (202) 473-9003
The World Bank partial risk and partial credit guarantee programs can be instrumental in private-sector infrastructure financing. The partial guarantees allow borrowers to secure long-term debt finance at low rates. Guarantees cover specific obligations undertaken contractually by a government -- such as allowing highway tolls to rise according to a previously negotiated formula, delivering fuel for a power project, or compensating for project delays caused by the government. In addition to insuring against political risks such as these, the programs also insure against traditional forms of country risk such as war, expropriation, and currency convertibility.
The partial risk guarantee can cover up to 100 percent of the principal. But the coverage -- designed by the events agreed to trigger the guarantee -- is set at the lowest level necessary to mobilize the financing. A partial credit guarantee, in contrast, covers only a portion of the financing, again set at the lowest level necessary. As an alternative to a normal credit guarantee structure, the World Bank also offers a put option structure.
International Finance Corporation
Point of Contact: James F. Martin, Senior Investment Officer, Infrastructure, (202) 473-8926
The International Finance Corporation is the division of the World Bank which provides financing to private sector projects as a lender or equity investor. The IFC is limited to 25 percent of the total project cost for the initial financing, and up to 40 percent for secondary financing. In addition to lending to the project, it may also take an equity stake in the project company and thereby play the role of catalyst for other investors from the private sector. The participation of the IFC often provides a great degree of comfort to other local and international project investors
Citing interest in particular opportunities in Argentina and Brazil, the IFC expects its involvement in Latin America to increase. The IFC’s largest environmental project to date is the 1993 renovation and expansion of the Buenos Aires water system by the recently privatized utility Aguas Argentinas. In the Brazilian market, the IFC is now considering financing water and wastewater concessions in two medium-sized cities in the state of São Paulo: Ribeirão Preto and Limeira.
The IFC-financed municipal wastewater project in Puerto Vallarta, Mexico, could be a model for other similar projects in Latin America. The project sponsor (the British firm Biwater), the IFC and the Mexican national development bank, Banobras, worked together to structure the project. The key was securing an acceptable payment guarantee for the municipal government. Banobras created a revolving line of credit which could be drawn on if the municipality was unable to pay the monthly fee to the operator. If the municipality is not able to replenish the draw down on the line of credit by a determined period of time, Banobras can then divert federal government grants and tax distributions destined to the municipality to pay back the line of credit. With this payment guarantee in place, the IFC provided a $7 million ten-year loan package as part of the $33.2 million concession project.
Inter-American Development Bank
Point of Contact: María Elena Barrientos, (202) 623-1088
The Inter-American Development Bank (IDB) is progressively putting an increased emphasis on the environmental aspect of its projects as well as on environmental infrastructure support. In approving an eighth capital increase in 1994, the IDB Board of Directors focused particularly on the necessity to address environmental issues.
The result of this renewed emphasis was the creation of an environmental division within the Social Programs and Sustainable Development Department. Environmental divisions were also created in each of the three new regional departments.
Moreover, moving away from its almost exclusive focus on the public sectors as agents of infrastructure creation, in August 1995, the IDB created new instruments for promoting private sector involvement, particularly in infrastructure projects.
In the last five years, the IDB has lent $4.8 billion to environmental projects, $1.186 billion in 1994 alone. All of these funds have gone to public sector entities which have subsequently carried out the programs or reloaned the funds to local implementing agencies.
The IDB is trying to promote public-private partnerships in infrastructure finance, particularly in potable water and wastewater projects. In Brazil the IDB is looking at arrangements where the private sector would finance 50 percent of a given project, followed by the IDB with 25 percent, and the national development bank BNDES with 25 percent.
IDB Private Sector Lending
Point of Contact: Makoto Sunagawa, Manager, Private Sector Department, (202) 623-1501
In September 1994, the IDB formed a new department charged with allocating 5 percent of the bank’s lending portfolio to private infrastructure projects without government guarantees. Up to $350 million will be set aside for the program per year. Bank participation may not exceed $75 million or 25 percent of the total financing. Private-sector infrastructure projects eligible for financing include those in transportation, power, telecommunications, and water and sanitation.
The Private Sector Department has approved the first six loans: three in electric power generation, one in electric power transmission, one in toll roads, and one in ports. The total value of each of the projects ranges from $30 million to $640 million.
Guarantees for Private Sector Projects
In an initiative similar to the World Bank's guarantees described earlier, the IDB is attempting to mobilize private sector resources for infrastructure creation by the implementation of a loan and risk guarantee facility directed mainly at private infrastructure projects. These guarantees would not require a counter-guarantee by the government in the recipient country.
The program is designed to complement the private sector and will be aimed primarily at infrastructure. One aspect of the new initiative are partial risk guarantees. They will mitigate risks stemming from dependence on public sector entities for supply of inputs or to purchase the good or service provided. The aim is to reduce the commercial risk of public sector entities reneging on their contractual obligations. For example, in the case of a private wastewater plant selling its treatment services to the municipal government, the IDB would offer guarantees of payment. These risk guarantees may provide up to 100 percent coverage in the case of a government’s inability to perform specific contractual obligations.
The second aspect of the new private sector lending program is aimed at the problem of short maturities in the financial markets. The program will provide partial guarantees for borrowing in the credit or capital markets, extending the maturity of available medium-term funding, thus transforming it into long-term financing. The instruments envisioned are:
guarantees for long-dated maturities;
liquidity guarantees in the form of put options and take-out financing (for example, post-construction); and
rolling guarantees that cover a fixed number of scheduled payments.
The result of the IDB guarantees will be to diversify risk and upgrade the investment grade of the relevant project providing it access to the large investment grade financial markets.
Inter-American Investment Corporation
Point of Contact: John C. Rahming, General Manager, Inter-American Investment Corporation, (202) 623-3901
To provide financing for private sector projects, the Inter-American Investment Corporation (IIC) was set up by the IDB in 1989. The IIC differs from the Private Sector Department in that it targets small- and medium- sized projects. IIC provides long-term loans and equity between $2 million and $10 million per project. The average IIC investment is worth $4 million. The IIC can finance up to 33 percent of new enterprises and up to 50 percent of project expansions. Projects financed by the IIC have been in a variety of sectors including: hydroelectric power, telecommunications, food processing, and health care. The IIC has reviewed a number of environmental technologies projects, but to date has not completed financing on any of these.
Bilateral Funding Sources
Export-Import Bank of the United States
Point of Contact: Craig O’Connor, Environmental Liaison Officer, (202) 565-3939
The U.S. Export-Import Bank of the United States (Ex-Im Bank) has seen an upswing in lending activity in the last two years. In 1994, it authorized $15 billion of financing, out of which $800 million went to environmentally beneficial exports. A considerable amount of effort has been directed towards Latin America, making it the single largest target for Ex-Im Bank financing in 1994 with $5.2 billion in authorizations. Brazil is the bank’s largest customer, having received $1.8 billion in authorizations in 1994.
In response to the movement away from sovereign-guaranteed lending, Ex-Im Bank established the Project Finance Division in June 1994, provides loans and guarantees on the basis of expected project revenue stream.
A. General Conditions
Ex-Im Bank offers considerable flexibility in the structuring of projects. For example, there is no upper or lower size limitation to projects nor a predetermined debt-equity proportion, and virtually any combination of risk insurance and loans may be utilized.
In order to receive Ex-Im Bank project financing, it is imperative to have long-term contracts from creditworthy entities for the purchase of the project’s output and supply of its inputs. Such contracts should usually extend beyond the period of requested Ex-Im Bank financing.
B. Loan and Guarantee Program
The loan and guarantee program offers medium- and long-term support for environmental projects. A special feature is the 15 percent local cost coverage provision which allows Ex-Im Bank funding to cover a greater portion of locally incurred costs such as installation and civil works. The program also allows capitalization of interest during construction as part of the Ex-Im Bank financial package.
C. Small Business Environmental Exports Program
Ex-Im Bank has recently focused on assisting the export efforts of small businesses. In September 1994, it blended its working capital loan program with that of the Small Business Administration (SBA). More important for small U.S. environmental technology exporting to South America is the Environmental Exports Program. The key to qualify for this program is that the equipment and services exported must be instrumental in having a positive impact on the environment. They must aid in the abatement, control, or prevention of air, water, and groundwater contamination or pollution, or provide protection in handling toxic substances.
One of the main features is the Environmental Export Insurance Policy which offers enhanced short- and medium-term, multi buyer and single-buyer insurance with 95 percent coverage against commercial losses and 100 percent coverage against political risk, with no deductible for small business environmental policyholders. The U.S. content for goods must be at least 51 percent, while for services it must be 100 percent.
General information can be found through Ex-Im Bank’s toll free number (800) 565-EXIM.
Overseas Private Investment Corporation
Point of Contact: Richard Greenberg, Manager, Latin America Investment Development, (202) 336-8616
Overseas Private Investment Corporation (OPIC) is an agency of the U.S. government which provides loans, loan guarantees, and risk insurance in cases where commercial lenders may be unwilling to step in. OPIC's commitments do not rely on a “sovereign guarantee.” Many OPIC commitments are undertaken in conjunction with other institutions, and OPIC may even take equity stakes in selected projects.
In the last few years, OPIC’s involvement in Latin America has increased significantly. In fiscal year 1994, OPIC provided $1.7 billion for projects in Latin America compared with $1.4 billion in the previous year. The amount is expected to have risen in fiscal 1995. Moreover, OPIC’s involvement in Latin American infrastructure projects has also increased dramatically with the opening up of local infrastructure markets to private participation. Telecommunications, energy, and transportation has already seen commitments of up to $200 million -- OPIC’s commitment limit -- in countries such as Argentina, Colombia, and Brazil.
One of OPIC’s specialties is its willingness to customize and devise solutions to various financing problems in cooperation with private banks, investment funds, multilateral agencies, or other agencies of the U.S. Government, such as the U.S. Export-Import Bank.
A. Loan Guarantees and Direct Loans
For large projects, both new ventures and expansions, OPIC primarily offers loan guarantees ranging from $10 - 200 million. For example, in 1994, OPIC committed a $100 million loan guarantee to the Bank of Boston for an on-lending facility in Brazil, which will respond to the demand for medium- and long-term loans in the country.
Moreover, guarantees have also been recently granted to two privately run equity funds. The South America Private Equity Fund is a $150 million fund focusing on the industrial, consumer, and services sectors in Latin America and is backed by a $100 million OPIC loan guarantee. The Global Environment Emerging Markets Fund, L.P. focuses exclusively on environmental projects. The fund will be investing in commercial opportunities involving clean energy, water treatment, air pollution control, and waste management. OPIC provided a $50 million loan guarantee which enabled the fund to raise $70 million for investment purposes.
Direct loans are reserved for projects involving U.S. small businesses and cooperatives and range from $2 - 30 million. OPIC will usually participate up to a level equaling 50 percent of the total cost of a new venture and up to 75 percent when the project involves the expansion of an already successful business.
B. Risk Insurance
One of the major problems facing an investor in Latin America is the problem of political and economic country risk. Only Chile and Colombia have so far received investment grade ratings from U.S. credit rating agencies. Brazil is currently rated B by Standard & Poors. Projects in a country like Brazil are very seldom given a rating above that of the country in which it is located regardless of the project’s inherent qualities.
OPIC’s economic and political risk insurance may, at least partially, eliminate this problem by enabling project sponsors to seek debt financing in investment grade capital markets. In fact, OPIC support often acts as a signal of quality to other investors.
OPIC insurance offers coverage against the following risks: currency inconvertibility, expropriation, and political violence.
Coverage is available for parent company and third-party loans and loan guarantees, technical assistance agreements, cross-border leases, and other forms of investment exposure. OPIC also insures contractors, exporters, and financial institutions. Moreover, coverage is also available for equity investments in new ventures or expansions.
C. OPIC Supported Direct Investment Funds
OPIC provides financing to U.S. companies involved in private-sector projects through several private OPIC-supported direct investment funds. The funds are fully private and are available for the Middle East, Eastern Europe, the Newly Independent States, and South America.
Some funds are exclusively dedicated to certain types of projects. For example, one fund solely invests in environmental projects; another exclusive works with small businesses. Generally, OPIC-supported funds invest 5 to 40 percent of the equity capital of each of their portfolio companies. Each portfolio company must have a significant business connection with the U.S. economy. The fund manager is usually active in guiding the portfolio company, especially in strategic planning and maintaining effective access to capital markets needed for growth.
In 1995 OPIC established an investment fund for Latin America with WestSphere Capital Associates. The South America Private Equity Growth Fund will focus on investments in manufacturing, financial, and service industries.
Point of Contact: John Lugar, Executive Vice President, WestSphere Capital Associates, (202) 434-8290
U.S. Trade and Development Agency
Points of Contact: Albert Angulo, Director, Latin America and the Caribbean, and John Herman, Brazil officer (703) 875-4357
The U.S. Trade and Development Agency (TDA) provides grants for U.S. firms in the form of funding for feasibility studies, desk studies, definitional missions, technical symposia, technical assistance, orientation visits, and reverse trade missions (cosponsored with U.S. industry). TDA-supported projects accomplish the twin objectives of promoting development of infrastructure in low and middle income countries and fostering U.S. exports of equipment and services. While grants for projects in Brazil have been limited in the past, TDA began to review requests for feasibility study grants at the end of 1995.
Among government funding sources, TDA is uniquely approachable. Its small size makes the decision making process quick. It is also particularly responsive to U.S. business because most TDA-funded projects come from unsolicited proposals submitted by companies. One of the agency’s most important activities is providing grants for project feasibility studies. Feasibility study grants, given to foreign governments to hire U.S. contractors, help U.S. companies get a decisive edge over foreign competitors in overseas markets and often provide the crucial first step toward winning major projects.
One of TDA’s active markets is environmental infrastructure. TDA has provided a number of recent grants for Latin American projects, including: a feasibility study for a municipal solid waste project in Corrientes, Argentina; a reverse trade mission of officials from a water utility in Mendoza, Argentina that was to be privatized; an environmental cleanup study associated with the Bolivian oil and gas company YPFB; and a feasibility study for an industrial wastewater plant in Concepción, Chile.
A good example is TDA’s support for SIDOR, a major Venezuelan steel producer. TDA believes that good business opportunities exist for steel-sector wastewater treatment facilities throughout Latin America. SIDOR is undertaking a $36 million project to upgrade its wastewater treatment and hazardous waste disposal system so that it can comply with local environmental regulations. TDA first approved a desk study, undertaken by Basic Technologies Inc., in June 1994. The study recommended a two-phased feasibility study. Phase I will consist of wastewater sampling and flow studies. Phase II will consist of an engineering study of alternative wastewater treatment systems. In April 1995, TDA approved the $300,000 feasibility study, and selected Chester Environmental to carry out it out.
Brazilian Public Funding Sources
Economic and Social Development Bank
Point of Contact: Mr. Aluysio Asti, Superintendent for Infrastructure, (55-21) 277-7312 / 277-7313
The Brazilian Economic and Social Development Bank (BNDES) offers financing to Brazilian companies that want to purchase capital goods and raw materials and invest in infrastructure, energy, or technology. Financing is usually medium term with repayment periods of 60 months. Given that Brazil’s high interest rates make commercial loans difficult to obtain, BNDES is the best source of project finance in Brazil for U.S. companies working with a Brazilian partner.
The bank finances three primary sectors: energy/ telecommunications; urban development services including environmental projects; and the naval industry.
The bank realizes that the profile of investment is changing and accordingly expects new loan requests to focus on infrastructure and public services. For 1995 BNDES has budgeted disbursements of $8 billion, up from $4.4 billion in 1994, and $3.3 billion in 1993. The bank has two subsidiaries: FINAME, which finances the purchase of Brazilian-made machinery, and BNDESPAR, which takes equity stakes in high-priority projects. BNDES also administers the National Privatization Program.
BNDES is trying to make it easier for small and medium-sized companies to participate in infrastructure development. The bank is working to develop a better working relationship with public-private partnerships, with a better allocation of risk. The new approach for concession projects, for example, will involve a joint venture feasibility study and analysis. This is radically different from the traditional approach in which projects were presented to the bank, which was subsequently responsible for all the research and analysis. It is also worth noting that the Inter-American Development Bank announced on August 22, 1995 that it will release $300 million for a BNDES financing program for small and medium-sized businesses in Brazil.
For environmental projects, BNDES is able to finance 75 percent of the total project value, though when dealing with projects financed through future receipts, this falls to 45 percent. Legal restrictions prevent the bank from providing financing to public sector entities.
In 1993, the bank disbursed $206 million for environmental and industrial pollution control projects. Resulting from investments in the production expansion or the implementation of other BNDES programs, $152.4 million was allocated for expenditures for environmental control. Under the Environmental Control Program (PCMA), $53 million in financing went to 85 projects which qualified for support. PCMA is a line of credit established to help Brazilian companies make the necessary investments to comply with environmental regulations. The PCMA supports investment in air and water pollution prevention and control; environmental recovery of polluted areas; reforestation; and improvement of worker safety, health, and hygiene.
A good example of a BNDES-funded environmental project is the Serra Municipal Waste Management Project. In 1992, BNDES financed $3.5 million of a $5 million project for the implementation of a solid waste concession program in Serra, in the state of Espirito Santo. The project consisted of an integrated system for collection and treatment of the city’s solid waste. It was structured through the concession of a broad range of services, including the construction of a composting and recycling plant, a hospital waste incineration plant, and a sanitary landfill.