Since Maria Silvia Bastos was named president of Brazil’s development bank, BNDES, in June 2016, the organisation has undergone profound change regarding policy and the role it can play in financing the country’s growth. The bank has gone from focusing on Brazil’s corporate giants to enthusiastically supporting smaller businesses; it has also shifted its attention from broad economic sectors to the specific merits of each financing request, incentivising social and environmental impact.
By deploying BNDES’s long-term financing rate differently, Ms Bastos wants to promote the growth of deserving businesses and help develop a pipeline of infrastructure projects – from road building to energy distribution to sewage networks – that will be appealing to local and international players, historically put off by the country’s legal set-up.
When Ms Bastos took the helm of BNDES, the Brazilian economy was still deep in recession and the political scandal centred around state oil giant Petrobras was raging, suffocating businesses’ growth plans. Brazil’s prospects are still shaky but the first signs of recovery, from a macroeconomic point of view at least, are becoming visible: gross domestic product is expected to grow in the first quarter of 2017, and inflation was at 5.35% in January, below expectations. She speaks to The Banker about the BNDES's plans.
Q: Brazil is set to emerge from recession this year, yet there is still uncertainty, not least because of ongoing political scandals. What is BNDES’s outlook for 2017?
A: We’re coming out of two years of deep recession, the deepest I’ve seen in our country. It affected all sectors. I’d say only agriculture was preserved because it has a [strong] competitive advantage, which was enhanced in the past by innovation, and has had very stable and favourable financing conditions by BNDES. This has prevented the crisis from being even bigger. But industry, commerce, services, energy and infrastructure were all affected. We were also living with a really high inflation rate, above target. [Inflation rose to 10.67% in 2015.]
At end of last year, this started to change. Inflation has been decreasing quickly and more than people expected; we also expected interest rates to fall to below two digits, down from 14% [the value of the central bank’s Selic benchmark rate at the end of November 2016, to 13.75% in December and 13% this January]. Of course, everyone is expecting the economy to grow again and for unemployment to decrease, but this will happen with time.
In Brazil, we don’t have much flexibility with our labour legislation. Unemployment [12% at the end of 2016] is unfortunately the last indicator to move. The industrial sector started showing some good signs at the end of last year and confidence as a whole has improved.
Of course, during this recession and even before, we had lots of idle capacity in the economy, so we’re not going to see huge investments all of a sudden. BNDES as a bank wants to improve sustainable growth, providing deserving companies with working capital to avoid running into financial troubles, especially small and medium-sized enterprises [SMEs]. We have created a temporary line of credit and have been evaluating it month by month. I can tell you that this programme is very important for the bank. We launched it last year and disbursed about 3bn reais [$972m] then; the budget for this year is about 20bn reais
Q: You are now focusing on small companies, rather than the big corporates BNDES had traditionally supported, and on individual projects rather than sectors. Is this a long-term strategy or an immediate response to Brazil’s economic and political situation? What does this mean for the bank’s role as a supporter and creator of national champions?
A: At the core of the bank are our operational policies. They’re the guidelines defining the assistance the bank can provide, guidelines through which our people analyse projects. We [carried out] a comprehensive review of these guidelines last year. It took us almost six months, and we made several changes. The most important one is about how we look at the merits of submissions. Traditionally, the bank had looked at sectors: industry, services, commerce [and what each sector as a whole needed].
The reality in the world now is that those sectors don’t have such clear demarcations any longer. We don’t talk about industries without services, we don’t talk about commerce without services. We have digital platforms, e-commerce, technical assistance for those platforms, so borders between sectors are blurring. It makes more sense to look into projects and the attributes of each: innovation, environmental impact, if it’s about an SME, if the project uses new technology, if it relates to education or health.
We also put a limit on the maximum amount of financing for each project at the BNDES long-term interest rate, the TJLP [which is 7.5%]. This is now up to a maximum of 80% [of a project], which makes a big difference because the bank used to be able to finance even 100% of the project at this rate [projects will need to secure other financing too]. We also no longer extend bridge financing [we focus on long-term growth]. It will not matter anymore if a project comes from A, B, C or D sectors, or A, B, C or D companies. I know that people say: ‘Ah, so you’re not going to have this policy of national champions anymore’, and I respond that we do, but [now] we give equal conditions to anyone who comes to the bank and we hope that the majority of them become national champions.
Look at agriculture and innovation. I’ve just come back from a trip in the south of Brazil and it’s amazing to see that a family-run agriculture business can be as productive as a big one because they have the same equipment, the same conditions, the same access to funding. We have a long tradition of financing agriculture in Brazil, more than 20 years, and the end results are impressive.
Q: As part of your new policies, you want to focus on social and environmental impacts. How will this work in practice and what results do you expect to achieve?
A: Yes, we want to focus on social and environmental impact. The level of TJLP financing we provide in each project has to do with the social and environmental impact of the project: if it has no impact it will be financed at [less favourable] conditions, but if it is about sanitation or renewable energy, for example, it will have a great amount of TJLP financing.
BNDES already incentivises renewable energy and as a result about 10% of our energy capacity is in wind power. Now we want to push other sources. With our new guidelines, we will finance solar energy up to 80% [of the project] and we decreased wind power financing to up to 70%. Another incentive is about fuel, reducing the percentage of TJLP that we give to finance vehicles, capital goods, that are fuelled by diesel, and increasing the percentage allocated to projects concerning capital goods that use clean fuels.
Q: Infrastructure is a sore point for Brazil and the need for investment as well as private and public sector financing has long been debated. How will BNDES move in this space?
A: BNDES has a very clear mandate in infrastructure. Indeed, the bank was created more than 60 years ago with this mandate. The bank has an incredible amount of knowledge across all areas of infrastructure.
We’re focusing on a number of things. First of all, with regards to the federal government, we’re providing technical assistance, we hire consultants, we work on the public auctions; we do this for railroads, roads, airports, energy distribution, anything that comes from the federal government.
Besides this, BNDES has developed a state programme that mainly focuses on sanitation. Brazil unfortunately has very bad statistics when it comes to sanitation, far from where the country should be. [Half the population lacks connections to wastewater facilities, according to the World Bank.] We’re trying to change this.
There are 27 states in Brazil. Eighteen have come to us and asked us to create a plan to bring sanitation services to the whole population in their state. We’re releasing six tenders to hire consultants to model these projects. We’ve recently started talking to each capital in those states and we’re trying, over time, to extend this to other big cities that are not state capitals.
We are also working on street lighting. In Brazil, the responsibility for street lighting lies with cities’ administrations. The intention is to build public-private partnerships [PPPs] for street lighting, and also for garbage collection. There is one PPP for street lighting in the country, in the city of Belo Horizonte, and there are some PPPs in garbage too, but they’re not widespread. We want to widen the programme.
We also want to fund infrastructure projects. There is no restriction on the funding we can provide as long as they are within our guidelines. [In 2016, BNDES disbursed 25.9bn reais on infrastructure projects, almost 30% of the total 88.2bn reais disbursed by the bank last year.]
And BNDES doesn’t just provide credit. We also work in equity and debentures [reais-denominated infrastructure bonds]. We have been very active in reviewing and improving the conditions of the market, especially the secondary market, for debentures. We’re working with the World Bank and the Inter-American Development Bank to develop a [debentures] curve and to foster the professional management of debentures funds to really develop this market and help to fund infrastructure projects.
Q: International investors and financiers often cite Brazil’s legal system and project requirements as risks they are unwilling to take. What role will BNDES play to ease their concerns and push ahead with the development of PPPs?
A: We can reduce risks for foreign investors [by providing guarantees] and, even more importantly, we can provide technical assistance to states and cities. Almost none of them have the capacity to develop tenders and create project models. This role of technical assistance to states and cities is really powerful. BNDES used to do this in some cases, but not comprehensively. You can imagine that we talk to [international players] all the time. Brazil has lots of investment opportunities. There’s lots of interest and our view is that financing is available for good projects. The question is how to deliver good projects.
In the past the rates of return were not adequate [in relation to the risks]. There was a great deal of legal risk. As a result, the concessions were not appealing and BNDES had to subsidise several of them. Indeed, we are still trying to solve problems regarding past concessions. We had to invest a lot of time to discuss what didn’t go well in the previous concessions. We’re trying to improve the regulatory conditions, including how we publish tenders. Tenders used to be only published in Portuguese. Now, from 2017, tenders are being published in English too. We are working very closely with the government regarding the privatisation programme and the regulatory framework.
This [hopefully] gives more confidence to international investors. Investors are not coming here for one or two years, they come for 20 years. As we talk to [investors and banks], we see that funding is available, but we need to provide solid projects to give them confidence.
