Foreign investments in the infrastructure sector throughout South America is the subject of the newly released ABA Business Law Section book (entitled Foreign Investment in South America: A Comprehensive Guide to Infrastructure and the Legal Environment), which enters the conversation at the right moment: when the majority of the countries in that region are encouraging investments in order to modernize their social-economic environment and foster development.
The Brazilian Constitution of 1988 established a new scenario for Brazilian socioeconomic development. Since 1988, the Brazilian legal framework has strongly fostered national and international companies’ investment in infrastructure through concessions and the privatization of several sectors—logistics, electric power, sanitation, oil and gas, mining, and telecommunications, among others.
In 2004, the PPP Act (Law 11,079) created new possibilities for private investment in infrastructure through public-private partnerships. The PPP Act establishes general rules for the bidding process and contracting out with private partners at both national and sub-national levels, in accordance with the Public Procurement Act (Law 8,666/1993). Among its features, the PPP Act allows public administration entities to assume long-term commitments, including the payment of subsidies to the private partner, with the overall objective of increasing efficiency.
With a favorable economic scenario, as from 2007, the federal government has launched public-private investment programs directed at socioeconomic development. The Development Furthering Program (Programa de Aceleração do Crescimento or PAC) and the Logistics Investments Program (Programa de Investimento em Logística or PIL) were extremely important in promoting good planning and proper execution of large works in social infrastructure, urban energy, and logistics in Brazil, all contributing to speedy, sustainable development.
In 2016, Law 13,334 introduced the Investment Partnership Program (Programa de Parceria de Investimentos or PPI), which aims to expand interaction between the state and the private sector through partnership agreements in order to implement public infrastructure projects and other privatization measures. The PPI does not create new modalities of public procurement, but only encourages and facilitates infrastructure projects with the use of contractual modalities that involve intensive and long-term investments, which are legally classified as “partnerships.”
The PPI’s purposes include: (i) increasing investment opportunities, creating jobs, and stimulating technological and industrial development in line with the country´s social and economic development goals; (ii) ensuring the enhancement and expansion of public services and infrastructure projects at a reasonable cost to users; (iii) promoting full and fair competition for the provision of services; (iv) ensuring stability and legal certainty on agreements with minimal government intervention in businesses and investments; (v) strengthening the state’s regulatory role as well as the autonomy of the regulatory agencies.
When the government identifies a project as qualified for the PPI, it should then be addressed as national priority. The agencies and other administrative entities involved should then guarantee that the actions necessary to the structuring, release, and execution of the project occur efficiently and economically.
As noted in December 2017, of the 145 projects eligible under the PPI, 70 assets have already been auctioned. It corresponds to the 48% execution of the schedule established by the federal government. Their estimate of investments with public sale is BRL 142 billion; with concessions, it is BRL 28 billion.
The Brazilian socioeconomic scenario is attractive for the Brazilian Development Bank (BNDES), which finances not only large-scale projects, but also small and medium-sized companies, individuals, and public entities. BNDES is the main funding agent for infrastructure projects. In 2016, BNDES launched BNDES Finem, a long-term financing project which may encourage greater participation from the private financial sector and capital market in infrastructure works considered a priority for the PPI, most of which are related to sanitation, logistics, urban mobility, energy, telecommunications, or oil and gas.
There are other financing sources available via state-owned banks and some national and international commercial banks, as well as some private equity firms focused on long-term investments. Debentures are also used to facilitate corporate funding for infrastructure projects.
Law 12,431/2011 introduced new debenture rules to encourage the private sector to finance long-term infrastructure projects, specifically in logistics and transport, urban mobility, energy, telecommunications, broadcasting, sanitation and irrigation. One of the most important changes was reducing tax on the income from debentures issued by Special Purpose Entities (Sociedade de Propósito Específico or SPE) companies organized to conduct infrastructure investment projects or projects for intensive economic production in research, development, and innovation considered a priority by the Brazilian government; these are known as infrastructure debentures. Infrastructure debentures may be issued on the local market, ‘packaged’ in depositary receipts, and traded (with a tax reduction) in the international secondary market directly by foreign investors.
Additionally, the government extended the same tax benefit to investment funds backed by infrastructure debentures. According to Law 12,431/2011, the tax benefit applies to income from investments in infrastructure debentures issued by an SPE or by companies that hold a concession, permission, or authorization to execute infrastructure projects or intensive economic production in research, development and innovation deemed to be federal priorities.
The Brazilian government also attempts to support innovation in order to raise productivity and competitiveness and to create wealth for Brazil. Law 10,973/2004, known as the Innovation Act, aims at incentivizing Brazil’s technological and industrial development by enabling strategic partnerships between universities, technological institutes and companies that all share the pursuit of knowledge as a central element. The recently enacted Law 13,243/2016 amended Law 10,973/2004 with the purpose of fostering research and scientific and technological development by encouraging partnerships between public and private sectors, as well as at reducing the red tape that interferes with investment in the relevant sectors.
Among other things, the new framework creates the concept of Scientific, Technological and Innovation Institutions (ICTs) which can be established as public entity or non-profit private entity incorporated under Brazilian law. The articles of association for an ICT include scientific or technological research or development of new products, services or processes in their purposes.
The federal government also establishes tax incentives for legal entities that develop technological innovation in the Brazilian territory. Through Law 11,196/2005, known as Lei do Bem or Law of Goodness, companies, universities and research institutes are granted several tax incentives to maximize their work in research and development (R&D), such as the reduction of 20.4% to 34% in corporate income tax charged for R&D expenditures and the reduction of 50% of the fiscal year tax on the acquisition of assets designated for R&D, among others.
In light of this, it is possible to conclude that Brazilian legal framework has been quite favorable to public and private investments in several sectors of infrastructure, which are essential for the country’s sustainable development by creating jobs and increasing people’s income.
