In Brazil, the maintenance of real gains in wages allied to relief of the tax burden on the costs and expenses involved in production - with declines in real interest rates, in the ‘Taxa de Juros de Longo Prazo’ (TJLP – Interest Rate on Long Term Loans), in payroll taxes, and the imminent reduction in the cost of energy - keep demand strong, configuring a scenario that encourages the resumption of investment, as has already been observed in the higher annualized rates-of-production indicators which suggest an upward trend in the assortment of products, inventories and income expected for 2013.
The acceleration of sales at the end of the year (2012) sold out inventories thus generating demand for replenishment of inputs in the production chain and goods in retail outlets, indicating further potentially positive pressure for the resumption of production. And for investments in infrastructure, official banks (BNDES – National Development Bank - and now the CEF – Caixa Econômica Federal and BB – Banco do Brasil) have announced lines of credit to finance the concessions of roads, railways and ports – at the mercy of positive changes in policies for granting of concessions - and even the creation of an Investment Fund to participate, with a minority stake, in the capital of SPEs (‘Sociedade de Propósito Específico’ – Special Purpose Entity) created in sectors under concession to leverage investments and restore levels of gross capital formation capable of providing support for economic growth without adding to their costs of transportation and warehousing and distribution logistics.
The Brazilian Federal Government’s foreign control agencies, on the other hand, are concerned with the increasing indebtedness of states and municipalities in foreign currencies: a trend that may increase if expectations are confirmed of a change in indices of public debt as agreed under ‘Lei Complementar 101’ (Complementary Law 101) - the Fiscal Responsibility Law - which most certainly requires a review of the status of declining real interest for all other economic agents.
In this context, public sector investment must be reinvented since one can hardly consider expansion of gross capital savings without the decisive participation of public investments at all levels of government.
Likewise, it is urgent to stimulate foreign funding in the form of venture capital since these two elements - public investments and foreign capital - are always present in investment cycles based on concessions, right from the beginning of capital formation in the country.
Indeed, on the historical timeline, since the time of Brazil’s ‘Segundo Império’ (Second Empire) until the more recent milestone of privatizations and of further expansion in all types of concessions, foreign and public capital have always been present: concessions to foreign capital were determining factors for the creation of services of public interest in transports of all kinds (railroads, seaports and urban transportation, which also required energy provided by foreign companies), telecommunications (such as telephony and telegraphy), gas, among others. Such investments accounted for over 80% in gross capital formation, despite the relevant participation of local entrepreneurs such as that of ‘Barão de Mauá’ – one of Brazil’s most important pioneering entrepreneurs in the 1800’s.
When unreal tariffs or the lack of a public policy in this area degraded and rendered obsolete investments in infrastructure, and made the participation of foreign capital impossible, private domestic capital combined with nascent state capitalism assumed the concessions. The adjustments in tariffs and incentives for the nationalization of assets rescued the profitability of investments in infrastructure (but not without trauma, such as the trashing of the trolley cars or the payment of damages by the concessions that were still in force).
When a new cycle of lack of investment (pressed by outdated tariffs and by the swollen management structures associated with growth in debt to compensate for losses in revenue) led to the cycle of removal from state ownership (i.e. privatizations) and concessions in the 1990’s, foreign capitals once again participated actively in offering venture capital and absorbing debts that were characteristic of the time.
During the ‘Plano Nacional de Desestatização’ (PND – National Privatization Plan) alone, foreign capital accounted for 36.4% of the capital invested in the country. If we consider the investments in telecommunications (sales of companies) and in privatizations by state governments, foreign capital’s contribution exceeds 60% in share.
At present, there is a potential opportunity for combining, all at once, the “reinvention of public investment” with greater participation of foreign capital in the matrix of investments in infrastructure: the opportunity to recycle the formidable stock of R$ 2 trillion (US$ 1 trillion) that circulate in the market of all kinds of investment funds in the capital markets.
With the decline in real interest rates, the search for variable income investments became irrevocable: most notably for pension funds
Mutual funds have their own legal personality. The investment of the funds raised by them are governed by ‘Editais de Captação’ (Notices of Fundraising) and therefore governance is guaranteed since they also require “ratings” to be evaluated by Investment Committees that recommend and approve the purchase of participations or shares representing the equity that they constitute.
Barão de Mauá
So why can’t municipal city halls or states (or the Federal Government itself) call for tenders via the ANBIMA (Brazilian Financial and Capital Markets Association) for institutions that are authorized by the CVM (Brazilian Securities Exchange Commission) to offer proposals to collect and separately manage funds for the development of assets, such as roads, railways, seaports, plants for the generation, transmission and distribution of power and gas, services in the areas of health, education and prison security or recycling of solid waste, whose receivables - in the form of tariffs or public services in consideration that will ensure the return of the funds invested and the return on equity required to safeguard the actuarial assets of shareholders in pension funds or the shareholders in mutual funds consisting of individual or business savings - so as to avoid conflicts of interest with Sponsored Investment Funds for Infrastructure (FIP-IE-P), which will be invested through the SPE created for this sole purpose?
At the end of the investment cycle, the assets that are produced are contributed as public assets to the federated entities (or the Union/Country itself) that sponsored their creation and their institution, compensating investors - who range from small institutional savers (via investment in the FGTS) to voluntary corporate savers and individual savers, as well as institutional investors in Sovereign Debt Funds or the shareholders of the former FUNPRESP, and rentiers who have gone without real gains since the ‘liposuction’ performed on real interest rates - for their quotas.
For the foreign capital that enters the country buying quotas in these funds (since the withdrawal of the principal or incidental “calls” during the cycle of investment must be previously agreed to), the profitability obtained following the investment’s grace period shall be exempt from Income Tax. And, when the principal is claimed by the investor, if the revenues are reinvested in new Funds, there shall be no withholding of income tax so as to relieve the burden upon the new investment.
The biggest advantage is the generation of investment without burdening public equity with debt, scalded by the ‘fiscal disorder’ of the 80s. Moreover, the participation of the public sector in ‘Fundos de Investimento Patrocinados’ (Sponsored Investment Funds) may occur through the purchase of shares (when there’s enough primary tax savings to do so) and through the participation in the ‘Conselho de Gestão dos Fundos’ (Funds Management Board) by means of a quota or share donated by its investors - without any sort of encumbrance, guaranteed by agreement of the shareholders to ensure the achievement of investment goals in conformity with existing public policies in each of the areas of investment considered.
(*) Saulo Krichanã Rodrigues is an economist and CEO of ‘SK Estruturação de Concessões e Parcerias Público-Privadas Ltda.’
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