Created by Law No. 12,431/11 to promote the participation of private investment in financing the infrastructure sector in Brazil, infrastructure debentures have been gaining ever more force since 2016, with the reduction of the participation of the National Development Bank (BNDES) in the financing of new projects and the stabilization of Brazilian macroeconomic conditions.

According to information released by the Economic Policy Bureau of the Ministry of Economy, in 2018 the issuance of infrastructure debentures reached R$ 23.9 billion, compared to only R$ 9.1 billion in 2017 and R$ 4.4 billion in 2016.

In general, the main attraction of these instruments for investors is the levying of reduced income tax rates on the income earned.

They may benefit from the issuance of infrastructure debentures for investment projects developed in the sectors of logistics and transport, urban mobility, energy, telecommunications, broadcasting, basic sanitation and irrigation, provided that they are members of the Investment Partnership Program (IPP) or are considered priorities by the industry regulator under Decree No. 8,874/16.

In this context, the government has been looking into possible changes to the current regulations of infrastructure debentures in order to create an even more favorable environment for private investment, with particular attention to pension funds, fixed income funds, and foreign investors. To this end, a set of amendments to Law 12,431 and Decree 8,874 are under discussion related to the following topics:

• possibility of issuing a new type of “series 2” infrastructure debentures, which would not be exempt from income tax for individuals, but would offer higher returns to investors in general in consideration for the possibility that the issuer may deduct from taxes levied on its income more than 100% of the interest to be paid to investors. This change aims to improve the prospects of return for corporate investors, in particular by favoring the attraction of large pension funds, which, as a rule, are more concerned with the return on investments than with tax benefits related to investment results;

  income tax exemption for income earned by foreign investors, improving the attractiveness of infrastructure debentures and encouraging fundraising abroad to finance the infrastructure sector;

  increase, from 24 to 60 months, in the term of expenses reimbursable with funds raised through the issuance of infrastructure debentures. The purpose of this change is to ensure greater flexibility for the development of infrastructure projects, since, in order to partially mitigate project risks to be borne by investors, it is quite common to issue infrastructure debentures only after projects are more advanced and have already received much of the investment required for their implementation;

  change in the rules for classifying funds as infrastructure investment funds, which currently have two years to create a portfolio with at least 85% infrastructure debentures. As such a deadline may discourage the receipt of new contributions by such funds in order to avoid possible disruptions over time, the creation of a 6-month moving average to assess the composition of the funds is discussed, ensuring that managers have more flexibility in time limits to meet thee portfolio composition requirements defined by Law No. 12,431; and

  changes in the process for classifying investment projects as priority under Decree No. 8,874. In short, the proposal would be to establish a simplified procedure for the analysis and classification process, so that, once certain relevance requirements are met, projects no longer need to be screened by the responsible ministry, as is the case today with those that are included in the Investment Partnership Program (PPI).

The amendments are still being discussed by the government and were not per se subject to a bill submitted to Congress thus far, but it is unquestionable that we are facing a new chapter in the history of infrastructure project financing in Brazil. Addressing much of the current market demands regarding infrastructure debentures, the changes under discussion may make it possible to create better conditions for the private sector to assume a dominant position as a long-term financier of infrastructure projects in Brazil.