Brazil, BNDES and Financing Infrastructure

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Wagner Bittencourt de Oliveira

Vice-President

Agenda

Part I: The Economy Fundamentals of the Brazilian Economy Investment: current status and perspectives Part II: BNDES Part III: Financing of Infrastructure Projects Infrastructure Division Logistics Investment Program Financing Infrastructure

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Agenda

Part I: The Economy Fundamentals of the Brazilian Economy Investment: current status and perspectives Part II: BNDES Part III: Financing of Infrastructure Projects Infrastructure Division Logistics Investment Program Financing Infrastructure

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Brazil has solid fundamentals to sustain economic growth

Stable legal and institutional framework; Social inclusion has driven the domestic market; Healthy banking sector unexposed to troubled assets; Robustness of the external sector; Strong long-term planning; Government is ready to foster growth:

Fiscal and monetary instruments; Improved regulatory framework; Private sector partnerships.

/ / 4

Expanding investment is a government priority

Gross Fixed Capital Formation (% of GDP) 24% 22% 20% 18% 16% 14% Source: IBGE.

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Increasing public sector investment

Public Sector Investment (% of GDP) 5 4 3 2 2,6 2,6 2,6

0,2 0,2 0,3 0,1 1,2 1,2 1,2

3,0 2,9

0,4 0,2 1,4 0,4 0,3 1,1

3,7

0,5 0,4 1,4

4,2

0,6 0,4 1,4

4,7

0,8 0,4 1,6

4,0

0,6 0,3 1,4

4,4

0,7 0,4 1,4 Central Government States & Municipalities States & Municipalities (self financing)

1

1,1 1,0 1,0 1,0 1,1 1,4 1,8 1,9 1,7 1,9

0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: IPEA.

State Owned Enterprise

(Central Government)

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Sound macroeconomic framework:

Declining Net Public Debt/GDP

Consolidated Public Sector Net Debt (% of GDP) 65

60,4

60

54,8

55

50,6

50

48,4 47,3 45,5

45

42,1

40

38,5 39,2

35

36,4 35,2 33,9

30

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

Source: Brazilian Central Bank. *position on November 2013

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Sound macroeconomic framework: Inflation is under control

CPI Inflation

(IPCA index, % YoY)

/ / 8

Source: Brazilian Central Bank and IBGE.

Sound macroeconomic framework: Strength of the external sector

International Reserves

(US$ billion)

/ / 9

Source: Brazilian Central Bank

Increasing demand for infraestructure

120 100 80 60 40 20 0 Airline industry, in million passengers

48 115

Total cargo holding in ports, in million tons 950 900 850 800 750 700 650 600 550 500 529 904

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120 100 80 60 40 20 0 Thousand vehicles per km on highways under concession

56,5 105,5

4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 New vehicles (buses, trucks, light commercial vehicles and cars), in million

4 2 Sources: National Agency for Civil Aviation (ANAC), National Agency for Aquatic Transportation (ANTAQ), Brazilian Association of Highway Concessionaires (ABCR) and Brasilian Association of Automative Vehicle Manufactures (ANFAVEA).

Agenda

Part I: The Economy Fundamentals of the Brazilian Economy Investment: current status and perspectives Part II: BNDES Part III: Financing of Infrastructure Projects Infrastructure Division Logistics Investment Program Financing Infrastructure

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2014-2017: very promising investment outlook

530 510 490 470 450 430 410 390 370 350 Investment Outlook for 4 years ahead Comparable Sectors

U$ billion constant prices

2014-2017 2013-2016 523,9 2011-2014 509,8 487,4 2012-2015 452,2 2008-2011 2009-2012 2010-2013 419,6 417,8 399,4 2007-2010 372,1 2006 2007 2008 2009 2010 2011 2012 2013

Source: BNDES

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Total Fixed Investment in Brazil may reach US$ 1.9 trillion in the coming 4 years (*)

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Investment Outlook for Brazil (2014-17)

(U$ billion - Constant prices) Δ % 2009-2012 2014-2017

Sectors Industry Infrastructure Housing 421.4

194.4

338.6

523.9

242.7

413.1

24.3

24.8

22.0

Agriculture & Services 547.6

716.7

30.9

Total 1,502.0

1,896.3

26.3

(*) Note: The BNDES research on the investment outlook for 2013-2016 covers 66% of the total industrial investments. and 100% of investments in infrastructure. totalizing about 58% of the investments in the economy (excluding residential construction). Agriculture and Services investments are based on queries to Sectorial entities and/or econometric forecast.

13 Source: BNDES

Logistics Investment Program (PIL) will contribute decisively to raising Brazil’s GFCF

Provisional estimates for GFCF (% GDP)

22,5% 22,0% 21,5% 21,0% 20,5% 20,0% 19,5% 19,0% 18,5%

21,5% 22,2% 20,7% 20,1% 20,6% 20,2% 19,5% 19,4% 19,8% 19,1% 19,1% 19,6%

2013f 2014f 2015f Without infrastructure concessions 2016f 2017f 2018f With infrastructure concessions Source: BNDES

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Agenda

Part I: The Economy Fundamentals of the Brazilian Economy Investment: current status and perspectives Part II: BNDES Part III: Financing of Infrastructure Projects Infrastructure Division Logistics Investment Program Financing Infrastructure

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BNDES: Among the most efficient development banks in the world

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Main source of long term financing in Brazil



100% Public



Stable Funding (FAT)



2,853 employees

Assets 

Instruments

   Direct Operations Outstanding Loans Indirect Operations MSME (financing and guarantee) Net Profit   Exports (Pre and Post shipment)

Project finance

ROA (%) NPL (%)

  Equity (Shareholding) Non-reimbursable Resources Foundation Employees

BNDES

367,825 254,019 3,009

0.90

0.06

1952 2,853 3,063

0.47

0.21

1948 5,190 2012 (in US$ million)

KFW

Germany

CDB

China

657,347 1,191,597

KDB

South Korea

147,067 526,401 1,016,959 9,995

0.92

0.30

1994 8,038 Source: Banks' balance sheets. We used the appropriate data to the IFRS (International Financial Reporting Standards).

85,572 836

0.50

1.60

1954 na Source: BNDES

Increasing demand for resources

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Converted to US dollar on the disbursement dates Average growth of 22% in disbursements during the 2008 – 2012 period

Source: BNDES

Diversified allocation of resources, keeping up with Brazil’s recent transformation

Disbursement by Sector 2007-2013 (%)

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Disbursement by Region 2007-2013 (%)

Source: BNDES

Support for large-scale firms, main actors in investment in Brazil...

Disbursement per Company Size – 2007-2013 (%)

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...but also financing MSMEs: important for job generation

MSMEs 2007-2013

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Export financing: Focus on capital goods and engineering services

3,0 2,5 2,0 1,5 1,0 0,5 -

Exports: Pre and Post Shipment by destination 2008-2013

Africa Acumulated in 12 months Europa e Ásia North America América do Norte South and Central America América do Sul e Central .

.

.

.

2008 2009 2010 2011 2012 2013 .

Source: BNDES

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Equity portfolio: institutional and strategic

Equity Portfolio Estimated market value (US $ b.) Nº firms with direct support Nº Investment Funds sep/13 45.4

203 44 Portfolio Composition – sep/2013 Oil & Gas, 47,4%

Source: BNDES

Mining, 17,5% Others, 10,1% Food & Beverage, 6,9% Pulp & Paper, 7,6% Electric power, 10,5%

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BNDES’ infrastructure loans are firmly on the rise

BNDES disbursements in Electricity and Logistics 2005-2013

Airports Ports, Terminals and Warehouses Highways

U$ billion

Railways Transmission Lines Distribution Alternative energy Hydro Power Plant 8,0 4,7 8,8 3,7

Logistics

11,4 12,7 13,4

Electricity

2007 2008 2009 2010 2011 2012 2013 Source: BNDES

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Government’s priority: disbursements to industry and innovation

Industrial Policy Disbursements (Brasil Maior Plan) 2007-2013 US billion

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Disbursement to Innovation 2007-2013 US billion

Source: BNDES

BNDES plays a key role in generating jobs

Estimated job creation or job upkeep associated with BNDES financing - 2007 to 2012 (in thousands) 7.000

6.000

5.000

4.000

3.000

2.000

1.978

1.156

1.000

2.841

1.618

4.460

2.225

4.356

2.245

4.843

2.376

5.033

2.536

5.871

3.178

0 2007 2008 2009 BNDES Disbursements

Sources: IBGE, MTE, FGV and BNDES. Elaborated by BNDES.

2010 2011 2012 Total Investments 2013

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BNDES fosters investment that otherwise would not exist

Growth in fixed assets of 3,000 industrial firms: supported x non-supported firms in 2010

Non Supported

21%

Supported

23% 10%

0% 5% 10% Investment without BNDES 15% 20% Induced by BNDES 25% 30% 35% Source: BNDES, based on SERASA data.

Sixteen published BNDES assessments between 2006 and 2013, of which 11 showed positive impacts, while five showed partial positive or less meaningful effects.

Topics: employment, productivity, balance sheets, firm exports, effects on local governments and sectors (four of these made by BNDES staff).

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BNDES: the same relative size, but Brazil´s credit market appears to be limited

BNDES and other development banks in 2012

(Outstanding Loans/GDP and Outstanding Loans/Total Credit)

21.0

7.4

4.6

11.3

12.4

8.0

15.5

12.7

KDB BNDES

Outstanding Loans/GDP

CDB

Outstanding Loans/Total Credit

KfW

Source: Annual reports of the respective banks, IIF and Central Banks of the respective countries. Produced by BNDES KDB: Korea Development Bank; CDB: China Development Bank; KfW: KfW Bankengruppe (Germany).

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Agenda

Part I: The Economy Fundamentals of the Brazilian Economy Investment: current status and perspectives Part II: BNDES Part III: Financing of Infrastructure Projects Infrastructure Division Logistics Investment Program Financing Infrastructure

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Infrastructure Division

Portfolio of projects

Projects status: disbursing and under analysis Sector Number of Projects BNDES Credit Line R$ 000

Generation

Electric Power Industry

Transmision Distribution

Subtotal

113 57 69

239

80,481,805 11,983,113 14,288,051

106,752,969

Roadways Railways Ports

Transportation and Logistics

Airports Pipeline Transportation Shipping industry Terminals and Warehouses Others

Subtotal

13 4 1 9

103

31 13 26 6 14,820,309 10,581,296 9,304,263 6,224,992 4,101,400 1,920,571 517,986 36,742

47,507,559 Total Investment R$ 000

132,711,492 23,493,635 27,581,080

183,786,207

27,026,849 31,830,684 18,853,977 9,861,837 8,690,000 2,901,865 736,449 41,619

99,943,280 TOTAL 342 154,260,528 283,729,487

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Infrastructure Division

Annual Disbursement

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Eletric Power Industry Breakdown 60 50 40 30 20 10 0 Infrastructure Division Performance 3

Energy Power Industry Transportation and Logistics

2006 7 9 2008 16 15 2010 19 25 2012 28 33

Forecast

2014E 40

R$ billion

44 2016E 50 20 16

Generation Transmission Distribution

34% p.a

13 14 17 19 12 12

60

8

50

4

40 30

0

20

2 6 8 2006 2007 2008 2009 2010 2011 2012 2013 Transportation and Logistics Breakdown

10 0

10 8 6

Railroads Toll roads Ports Airports Others

40% p.a

5 7 9 4 3 3 2 1 1 1 0 2006 2007 2008 2009 2010 2011 2012 2013

20 18 16 14 12 10 2 0 8 6 4 3 2 1 0 7 6 5 4 10 9 8

Infrastructure Division

Approvals between 2003 and 1 st semester of 2013

Transportation and Logistics Sector Installed Capacity Number of Projects R$ 000 R$ 000

Highways 40 14,792,293 26,635,253 Railways Ports, Terminals and Warehouses Airports 5,064 km 2,237 km, 15,212 wagons and 227 locomotives 107,429,148 tons/annum 28 48 14,096,989 7,547,282 30,211,077 15,101,869 57 MM pax/annum 11 3,630,718 8,060,049

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TOTAL

223 Ships 1,331 km 31 1

158

2,496,449 1,902,700

44,466,431

3,071,277 8,690,000

91,769,525

Agenda

Part I: The Economy Fundamentals of the Brazilian Economy Investment: current status and perspectives Part II: BNDES Part III: Financing of Infrastructure Projects Infrastructure Division Logistics Investment Program Financing Infrastructure

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Logistics Investment Program

Highways (1/2)

A snapshot of the brazilian road network 18,000 60 Private Roads (Km) 16,000 Concessionaires 50 14,000 40 12,000 10,000 8,000 6,000 4,000 2,000 0,000 30 20 10 0

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Federal 4,774 km

Private Roads 31% 69% PIL will increase the current network toll road by near 50%

States 10,680 km

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9 road stretches

•

Totaling 7,000 km

•

Estimated investment US$ 23 bn

Logistics Investment Program

Highways (2/2)

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Main Regulatory Aspects

• • • Duplication works should take place within five years.

The EPL - Logistics and Planning Company (a state-owned company) is responsible for obtaining environmental for duplication and improvement works.

Toll charging will be authorized after the completion of 10% of duplication works.

Road Concession Auctioned Tariff discount Bidders Km

BR-050 (GO/MG) BR-060/153/262 (DF/GO/MG) BR-163 (MT) BR-163 (MS) BR-040 (MG/GO/DF) Total 42,4% 52,0% 52,0% 52,7% 61,1% 8 5 7 6 8 436.6

1,176.5

850.9

847.2

936.8

4,248.0

CAPEX (US$ bn)

1.15

3.05

2.35

4.35

3.35

14.25

Next Auctions Stretch

BR-262 (ES/MG) BR-101 (BA) BR-153 (GO/TO)/TO-080 BR-116 (MG) Total

Ongoing feasibility studies CAPEX (US$ bn)

0.85

1.80

2.40

2.50

7.55

Logistics Investment Program

Railroads (1/2)

Current railroad network 12 Concessionaires (28,314 km) ALL (4 stretches) Vale (4 stretches) Transnordestina 4,207 MRS Others (2 stretches) 412 1,674

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Cargo Volumes 11,738 10,283 182 203 221 232 258 271 244 278 291 298 76% iron ore

billion tonne-km

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Logistics Investment Program

• • • • • 11,000 km railroad concession 12 railroad stretches 35-year term Estimated investment: US$ 45.5 bn Segregation of the system into two separate private parties: (1) the infrastructure manager and (2) the rolling stock operator

Logistics Investment Program

Railroads (2/2)

New Regulatory Model: open access 1

The Concessionaire owns the right to exploit the railway.

2 3

Valec (state-owned company) purchases the integrality of the operational capacity of the railway, and pays a tariff to the Concessionaire.

Valec sells the railway capacity to rolling stock operators, which can be a cargo owner, independent train/logistics operators, and rail concessionaires.

Financing Financing Rail Infrastructure Manager Rail Rolling Stock Operator Cargo Owner

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Valec purchases 100% of the new rail capacity… …and sells it to train operators through public tenders

►

Guarantees the remuneration of the network administration

►

Guarantees fair prices for rolling stock operators

Logistics Investment Program

Airports (1/2)

• Infraero (state-owned company) - responsible for the maintenance, operation and investment of 67* airports that accounted for 97% of the Brazil total passenger traffic.

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Regulatory Model 1st Round (2012) GUARULHOS (SP) VIRACOPOS (SP) BRASÍLIA (DF) Passenger (Million) 32.8

8.9

15.9

Winning bid (R$ billion) 16.2

Premium over the Minimum Bid 374% 3.82

4.51

160% 673%

* Before the auction of GRU, BSB, VCP, CNF and Galeão

Expected Concession investment Term (R$ billion) (years) 5.2

20 8.7

2.8

30 25

Logistics Investment Program

Airports (2/2)

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1 Concession of the two of the major international airports 2nd Round (2013) GALEÃO (RJ) CONFINS (MG) Passenger (Million) 17.5

10.4

Winning bid (R$ billion) Premium over the Minimum Bid 19.0

294% 1.82

66% Expected Concession investment (R$ billion) Term (years) 2.8

25 1.8

30 2

Investment in Regional Airports - US$ 3.6 billion in 270 regional airports. • • Strengthen and restructuring of Brazil's regional aviation network.

Regional airports will be managed through administrative PPP.

3 Authorization for private airports dedicated exclusively to general aviation.

Logistics Investment Program

Ports (1/2)

New Port Law (n o 12,815/13) changed the Regulatory Framework New law (n.12,815)

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Allowance of Authorizations (Private Ports) Private ports are now allowed to handle third-party cargo

and thus to

to Handle Third- Party Cargo

freely compete against concessionaires of public port terminals.

Obligation to Hire Workers from the Port Labor Management Agency (OGMO) Only the concessionaires of public port terminals

are obliged to hire workers from OGMO.

Renewal of Concession Contracts Signed before 1993

Government plans to

re-auction

these terminals under the new ports law. There are 94 terminal in this situation, mostly focused on liquid bulk cargo. Two ways for private exploitation of ports: (i) concessions (for terminals located inside public ports): need to be auctioned and must include: expiration date, renewal clauses, leasing fees and the restriction to hire workers from OGMO (Port Labor Management Body) (ii) authorizations (for terminals located outside of public port zones, i.e. private ports): does not require a public auction, only an authorization. There were two types of authorizations: exclusively for handling owned cargo and both owned and third party.

Logistics Investment Program

Ports (2/2)

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Investment opportunities: R$ 54 billion

Regulatory Agency (ANTAQ) announced that has already received 123 request for authorization, of which: • • • • 63 for port terminals - R$23.5bn investment 44 trans-shipment terminals, amounting to R$1.6bn investment 11 small-size terminals and 5 touristic terminals For public port concessions, the auctions will be divided into four blocks totaling R$27bn in investments among 159 bidding processes: • • • • Block 1 (R$5,4 bn): 10 terminals in the Ports of Santos (R$ 2,0 bn) and 20 terminals in the Ports of Pará ( R$ 3,4 bn).

Block 2

: 11 terminals in the Port of Paranaguá ( R$ 2,8 bn) and 6 terminals in the ports of Bahia.

Block 3: Ports of Suape, Itaqui and remaining North and Northeast terminals.

Block 4: Ports of Vitoria, Rio de Janeiro, Itaguai, Rio Grande and Sao Francisco do Sul;

Agenda

Part I: The Economy Fundamentals of the Brazilian Economy Investment: current status and perspectives Part II: BNDES Part III: Financing of Infrastructure Projects Infrastructure Division Logistics Investment Program Financing Infrastructure

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Financing Infrastructure

Stimulating bonds issuance

• The size of the loan is calculated taking into account the project’s capacity of repayment.

• Debt Service Coverage Ratio (DSCR ) ≥ 1.2

• Instalments calculated using the Constant Amortization System • • The amortization curve can be based on French Amortization System (Price Table), in case the SPC issues bonds.

Collateral sharing. • Repayment schedule of bonds customized according to the cash flow generation of the project.

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Financing Infrastructure

Guarantees

General Structure

Loan Tenure

• • • • Debt service account (3 instalments) Pledge of the SPC’ shares Pledge of receivables and rights (including any indemnity payment) Step in rights

Pre-Completion Post-Completion

• • • • Corporate Guarantee Bank Guarantee Equity Support Agreement Package of insurance • Operational and Financial Covenants

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Financing Infrastructure

Holdings and SPC’s

Brazilian Infrastructure Bonds and infrastructure investment funds – benefits for non-resident investors: (i)zero Income Tax rate (ii)zero IOF (Financial Operation Tax) Bond Equity Bond Equity

SPC 1 Holding SPC 2 SPC N Government Banks/Funds may co-invest with strategic and financial investors, either directly in the SPC’s or through the holding company’s equity, taking minority equity stake

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Financing Infrastructure

Loan conditions

Financial Conditions – Logistics Investment Program Sector Toll Roads Airports Ports Railroads (up to - years) 5 6 months after the conclusion of the project 5 (years) 25 20 up to 20 30 BNDES Credit* * 70% Financial Cost Spread (% p.a) 2.0

70% 65% 0.9 + Risk rate TJLP 5.0% p.a

2.5

70% 1.0

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* Limited to DSCR ≥ 1.2

Thank you!

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