A New Model to Chip Away at the Infrastructure Financing Gap: Brazil Leads the Way

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Infrastructure bottlenecks have created seemingly perpetual traffic jams in and around São Paulo. Photo credit: Marcelo Camargo/ABr.

There’s a lot of time for innovative thought when you’re stuck in traffic in São Paulo.
Perhaps that’s why, in the words for Deborah L. Wetzel, World Bank Country Director for Brazil, “São Paulo has continuously innovated to overcome its infrastructure bottlenecks, often becoming a model to other states in Brazil.”
With a loan signed last month between the state and Banco Santander, and insured by the Multilateral Investment Guarantee Agency (MIGA), the state is at the vanguard of infrastructure financing.
Forty-one million people use the state’s transportation networks. While the network is one of the most developed and modern in Brazil, it is still insufficient for the state’s needs.

The State of São Paulo has sought to address the situation for some time, and the World Bank has played an important role through lending and technical assistance. An important component of this work is the São Paulo State Sustainable Transport Project that aims to rehabilitate roads in several key corridors and to reconstruct two bridges.

Yet, with a total cost estimated at $729 million, this project has faced a major financing hurdle. In September 2013, the World Bank approved a $300-million loan toward the initiative. But with growing demand for loans from Brazil’s poorest states, the bank was unable to commit additional funds. The State of São Paulo itself committed $129 million. That left a shortfall of $300 million.

How was the state going to mobilize these funds at a cost that would be acceptable to taxpayers?

A partnership with MIGA was a natural answer. In addition to political risk insurance, MIGA provides credit-enhancement products that protect commercial lenders against non-payment by a sovereign, sub-sovereign or state-owned enterprise.

In an unprecedented move, the State of São Paulo bid out the project to commercial banks with a requirement that their loans be backed by MIGA’s credit-enhancement instrument.

The result:  MIGA issued guarantees to Banco Santander on a $300-million loan. With MIGA’s credit enhancement, the cost of the commercial loan was lower, and the length of the loan was longer, than São Paulo could have achieved on its own. The additional financing will be used to increase the scope of the project’s activities.

MIGA’s support for  this milestone project will help make the State of São Paulo’s transport system more reliable, safe and resilient to natural disasters. Together, the MIGA-backed Santander loan and the World Bank loan will finance the rehabilitation and upgrading of 650 kilometers of roads and the reconstruction of two bridges for transport on the Tiete River.

These improvements will reduce logistics costs, benefiting local and regional industry. The state also expects the project to increase employment and wages across a wider geographic area.

What’s more, the World Bank Group’s involvement allowed Banco Santander to book the risk of the transaction as World Bank/MIGA exposure rather than São Paulo or Brazil exposure. That helped the bank preserve lines of credit for other operations in Brazil.

Brazil may already be looking at this model for projects in other states, and Business News Americas is asking whether MIGA’s loan guarantees will take off in the region as a result of this deal.

Perhaps they will.  Hopefully the model will be used in other regions, as well.

But the even more important point is this: With a yearly $1.5 trillion price tag for infrastructure needs in emerging economies, we need all hands, all products, all forms of cooperation on deck.

This innovative financing mechanism in Brazil is a formidable example.



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