There is a consensus among analysts who observe the Brazilian economy that it should grow four to five percent a year for the next decade. As with most major developing countries, macroeconomic fundamentals tend to enable this growth pace for many years – although in the short term, the emerging economies are being urged to restrain demand expansion so as to control a still worrisome inflationary pressure.

In the long run, each of these economies will face considerable challenges. In Brazil, the relevant challenges lie in the microeconomic field (competitiveness, with emphasis in technology and production scale) as well as in institutions (regulation, planning, governance), underscoring the need for infrastructure expansion, mainly in energy and logistics (roads, railways and ports).

According to official governmental and private company surveys, infrastructure expansion in Brazil will require investments amounting to $2trn in the next 10 years. A little more than half of this amount will be applied in energy – at least $600bn in pre-salt oil and gas and another $500bn to expand electric power generation and transmission capacity.

Funding distribution
The energy sector in Brazil, which has a new focus on renewable energy, has been one of the most promising and innovative in the world. The main reasons for this are: (i) the domestic demand’s steady growth and the existence of a vast external market for some products (mainly oil and ethanol); (ii) a sound planning structure and favourable regulatory environment; (iii) relevant actors and global companies with room and appetite to grow; (iv) a prodigious potential of exploring renewable energy, highlights being wind power and sugarcane biomass, both in full expansion; and (v) good supply of innovative financial resources and instruments to finance the supply expansion. In view of all these reasons, there is significant room for investment in equity, financing, and mergers and acquisitions.

For years, the necessary increase in the capacity of electric power generation in Brazil has averaged 5 GW a year (ranging from 10 GW to 12 GW of installed capacity, given an average load factor slightly below 50 percent by virtue of high seasonality, mainly in terms of hydrologic flows and wind regimes) – representing an average investment of BRL 30bn ($18.6bn) a year in new plants.

Added to the investments in lines and other equipment required for the transmission and distribution of this energy in a vast territory, the need of resources amounts to some BRL 65bn ($42bn) a year. Out of this total, we estimate (based on average values of projects under LCA advisory) that around $180bn are intended for renewable sources, substantially to hydric, wind and biomass sources. Finally, around $100bn will be devoted to the expansion of production capacity in sugarcane and ethanol through the current decade.

This is a considerable amount of resources for any economy, at any time. Either as equity or debt, there is room for new investors in energy in the country. Using an equity-debt ratio of 30-70 percent, we come to $350bn in equity; as for the financing resources, those shall be sought in the market, since the main long term financing agencies in Brazil (development banks such as BNDES and BNB) are not able to extend their portfolio at the same pace – they shall, moreover, support the other infrastructure sectors with equally relevant investment programmes in the same period.

Investment incentives
In order to prompt new long term funding instruments for infrastructure, the Brazilian government recently granted tax incentives for application in debentures: foreign, as well as domestic personal investments, will not pay income tax on capital gains on these securities, which should yield six to nine percent per year after CPI inflation, depending on the risk analysis of each project.

These rates are attractive to many investors around the world as well as to the borrower, inasmuch as the projects have displayed sufficiently high rates of return.

Clearly this is a key moment for the Brazilian economy and the country’s infrastructure. And of all the sectors, energy – having a tradition in planning and standing as the focus of recent governments – is the best prepared to grow.

Fernando Camargo is Director of Investment, Corporate Finance and Energy at LCA; fernando.camargo@lcaconsultores.com.br; www.lcaconsultores.com.br