Ana Paula Vescovi: Public or Private?

The recent trajectory of private investments suggests that investor interest in infrastructure in Brazil is growing. The main agenda to unlock the infrastructure is to avoid the temptation to “charge” public investment and persist in the strategy of attracting the private sector, working on its continuous improvement.

The endowment of infrastructure in Brazil is around one third of GDP, a level below peers (50% to 60%) and below advanced economies (75%). After the 2015/2016 recession, annual investment flows fell by 25% on average, largely because of the shrinking public sector in the face of an unprecedented fiscal crisis. While private investment has practically returned to pre-2016 levels, public investment has dropped to less than half.

In 2020, investments in infrastructure reached the amount of BRL 125 billion (excluding oil and gas) and were led by electricity (45.4%), followed by telecommunications (25.1%), logistics (18.1% ) and sanitation (11%). Internal data from Santander indicate values ​​for the oil and gas sector close to R$ 63 billion.

A superficial analysis would conclude that it is enough to increase public investment to expand infrastructure. However, it was precisely the excess of public spending that led to the serious crisis of 2015/2016, from which the country has not yet recovered. Following this path would overload the public debt, increase its rollover cost and miss the achievements of recent years.

​In economic terms, the optimal way would be to strengthen private participation, attract foreign savings, advance in the containment of mandatory public expenditures and make room for expanding budget choices, including infrastructure.

While private investments advance steadily, increasing potential GDP, governments could focus on correcting imbalances in public accounts, improving the effectiveness of social spending and the legal certainty of business.

It would be equally or more important to replicate the governance experience of this process, which increasingly involves the private capital market. If the amount raised in debentures in 2016 was only BRL 6.7 billion, in 2021 it increased tenfold (BRL 68 billion), already with the share of the stock market.

Both domestic and foreign investors look at risk and return data with a magnifying glass. Financial institutions have expanded their teams of analysts and consultants, and more and more actors interact in the selection of projects for investors of different natures, purposes and geographies.

Funds dedicated to infrastructure (private equity) have specialized in raising funds for investments in previously selected projects. In addition to pre-selection, they provide regulatory and tax advice and also contract the operation of public concessions until their maturity, for future transfer to interested parties.

This means that the deepening of the participation of the private sector at both ends —investor and resource borrower— brings the benefit of a more efficient application, selecting the most viable projects according to their opportunity cost, which observes similar projects in other countries or the remuneration of public debt securities, free from market risk.

Therefore, the greater the use of public resources in fiscal imbalance, the greater the opportunity cost and the smaller the list of projects with viable returns. In fact, using public resources in this condition can stunt infrastructure advancement in the long run.

However, the public sector plays an important role in this private dynamic. In addition to improving regulatory frameworks, it originates a large part of the operations, through concessions, asset sales or authorizations.

Examples abound. In the capital market, the fundamental change was the new long-term interest rate (TLP), which removed subsidies from the BNDES, always at the expense of the Treasury. Without the hypertrophy of public funding, TLP catapulted private credit. BNDES remains fundamental to complement the private market, especially in the longer term.

In terms of regulation, there was an important improvement in the regulatory frameworks in oil, electricity, gas, sanitation, railways, telecommunications. In management, the landmark has been the Partnership and Investment Program —PPI, started in 2016— with a focus on project governance and attracting the private sector, with technical and transparent interaction with investors, in a single locus —which has been followed by several states.

The key to the decision-making process is the risk-return equation, under technical evaluation, with multiple actors interacting at all stages, which should also apply to public investments. The pricing policy based on market parameters was fundamental for attracting investors in more balanced projects, reducing dependence on state-owned companies and uncertainty.

​At the end of this story, consumers win, with more comprehensive, more stable and secure services, with better quality and fairer rates.