Among the many reforms undertaken by the new Brazilian Administration of infrastructure since September of last year - such as the massive privatization program, which has given new impetus to the market, or BNDES's new collateral-sharing policies, which aim to give greater comfort to commercial banks -, the approval of Provisional Presidential Decree No. 777/2017, which establishes the Long-Term Rate (TLP) and was converted into law, is worthy of note.

The TLP comes to remedy market distortions that, according to the government, were generated with the Long-Term Interest Rate (TJLP) and burden the public coffers. The main one of these distortions is the fact that the remuneration by BNDES of the National Treasury with proceeds of the TJLP - with interest rates far lower than the rates applicable to the federal government bonds with which the Treasury finances itself - would generate losses that would be hidden in the public debt and would constitute a kind of subsidy, and not a mere long-term loan.

Given that the interest rate in BNDES’s transactions are not linked to the Central Bank's base rate (Selic), since it only affects part of the public credit in the economy, Selic would need to be higher than the natural rate to achieve the desired results, thereby compensating for the reduction in the effectiveness of monetary policy. That is, companies that do not obtain credit with BNDES bear higher interest rates, which even discourages private financing and depends on the base rate.

Replacement of the TJLP, which until today is based on BNDES’s policy, with the TLP will take place in three stages:

• Start: Valid for contracts signed after January 1, 2018. The TLP will be based on the sum of the IPCA and the real interest rate that the TJLP already includes. A factor will be calculated that, multiplied by these real interest rates, will correspond to the interest rate on the five-year Series B National Treasury Notes (NTN-B) used by the government to finance its debt and to stabilize inflation.

• Transition: It will continue like with the start, but the adjustment factor between the real interest rates of the TJLP and those of the NTN-B will be progressively increased until 2023, bringing the real interest rate of the TLP closer to the rate paid by the government on its bonds.

• Consolidation and future: Gradually adjusted, the TLP will match the total real returns of the NTN-B combined with inflation in 2023, effectively extinguishing the difference between what the government charges and pays in interest on the new contracts.

In addition to remedying distortions, the federal government wishes to stimulate private financing with commercial banks, by bringing in more transparency in the allocation of "subsidies" by reducing any credit distribution failures for financing; to promote an improvement in the capital market, thereby making it more competitive, as we shall see below; to give more room for foreign multilateral organizations to act as financiers of infrastructure projects in Brazil, especially in Brazilian Reais, therein counting on efficient hedge mechanisms, among others.

BNDES and infrastructure financing have undergone a process of restructuring, guided by the withdrawal of the institution from its role of being the center of transactions. The idea is that BNDES would no longer have an isolated role and will complement the role of capital markets, especially with the revival of the use of debentures in infrastructure projects.

With the equalization of the interest rate (TLP) to the rate of federal treasury notes, capital markets will become more competitive with respect to BNDES and may offer more profitable long-term financing options, which will encourage the participation of private commercial banks in these transactions. It is understood that BNDES expects to reduce its exposure to infrastructure financing, partially and gradually, which would then become more independent in its activities through the use of private agents, thereby relieving the State, but ensuring the development of Brazil’s infrastructure.

It should be noted, however, that in the short term, a period of adaptation will be necessary, since the private market may not be able to immediately fill a vacuum created by BNDES's reduced exposure to long-term investments.

On the other hand, it is necessary that BNDES's role and its interest rates conform to the new national reality and to the directives of privatization and decoupling from the State, thereby untying certain knots that still bind the state bureaucracy in its strictest sense and that, depending on the current government, may direct it towards policies more or less beneficial for the development of Brazil’s infrastructure.

Clearly there is a trade-off between the TLP’s objectives and possible short-term effects. It will, of course, be up to the State to guarantee the legal (and political) certainty of this starting rate for more effective market participation. The expectation is that it could fill the space that should open up in long-term financing of infrastructure projects as a result of the effects of the new law.