Alberto Faro and Felipe Baracat
The economic impacts of covid-19 on the infrastructure sector can already be felt in Brazil, especially as relates to demand, considering the slowdown in economic activity caused by social isolation measures, and as relates to the financial stability of projects. At this time especially the availability of investments for the sector is a challenge.
With this in mind, new proposals for legislative changes are being discussed with the aim of combating the short-term economic effects of the pandemic and addressing the recurrent problems of lack of investment in infrastructure that will be accentuated in the post-crisis period. The focus will be on leveraging the participation of private players through access to the capital markets.
Congressmen João Maia and Arnaldo Jardim, respectively chairman and rapporteur for the special committee for the new General Law on Concessions and PPP (LGC), recently released to the market a draft bill which will be presented to the House of Representatives proposing the creation of infrastructure debentures, which should grant tax benefits directly to issuing legal entities, and amending the legislation relating to incentivized debentures and funds for investment in infrastructure and in research, development, and innovation.
The debate initially arose at the end of 2019, under the LGC committee, with the proposal to update the regulatory framework of the infrastructure sector in Brazil. The new LGC bill, which has over 220 articles, was approved by the committee in early 2020, and will proceed for a floor vote.
However, in the last week of April and as an emergency measure to combat the covid-19 pandemic, Congressman Arnaldo Jardim presented the market with a new draft bill, the text of which was highlighted by the LGC and which includes specific provisions on debentures and infrastructure investment funds. This new bill will be presented to the House of Representatives very soon, as a matter of urgency, such that the separate procedure will speed up the debate.
We have had access to the draft of the new bill and we have advanced below some of the main proposals, which will still be debated in Congress:
- Creation of a new kind of debentures, infrastructure debentures, which will grant tax benefits directly to the issuers and which have many similarities with the incentivized debentures, but with which they should not be confused.
- Expansion of the list of infrastructure projects that can be prioritized.
- Independence of a ministerial act for evaluation and classification of the projects, it being sufficient that the ventures be included in the sectors listed. These measures are applicable to both incentivized debentures and infrastructure debentures.
- Express provision for FIP-IE (Infrastructure Investment Funds) and FIP-PD&I (Investment Funds for Participation in Intensive Economic Production in Research, Development, and Innovation) to be able to invest in re-bidded or postponed projects, including those started before Law No. 11,478/07.
- For FIP-IE and FIP-PD&I, (i) extension of the period for payment of shares and the period for classification of the minimum investment percentage to 36 months; and (ii) revocation of the parameters for a minimum stake and maximum concentration of shareholder and/or income earned.
- Extension of the period for demonstration of costs, expenses, or debts repayable, from the public offer of debentures, from the current 24 months in a staggered manner up to 60 months;
- Elimination of the requirement to create segregated projects for the expansion of existing projects, whether already implemented or those in the process of implementation. This should considerably reduce bureaucracy and facilitate fundraising for projects to expand existing infrastructure.
- Possibility of remuneration of debentures per pre-fixed interest rates, including linked to price indexes, foreign exchange rate variation, Interbank Deposit Rate (DI), or the Reference Rate (TR).
Creation of the new infrastructure debentures
The Plan proposes the creation of infrastructure debentures, financial instruments that have similarities with the incentivized debentures, regulated by Law No. 12,431/11, but with which they should not be confused.
We call your attention to the fact that debt instruments deriving from Law No. 12,431/11 are usually known in the market as infrastructure debentures, which requires increased attention given the nomenclature of the different kinds of debentures as of the bill's proposal.
The main innovation of the infrastructure debentures will be to encourage greater participation of corporate investors in infrastructure projects, especially institutional investors. The incentivized debentures of Law No. 12,431/11 centralize their tax benefits in the figure of the individual investor.
As with the incentivized debentures, the concessionaires, permissionaires, or licensors of the public services defined, as well as lessees, incorporated for a specific purpose and in the form of a corporation, or their direct or indirect controlling companies, may issue infrastructure debentures, provided that the allocation of funds complies with the legal guidelines. The funds raised through public distribution of the debentures shall be allocated to investment projects in the area of infrastructure or intensive economic production in research, development, and innovation considered a priority, pursuant to Law No. 11,478/07.
The bill proposes significant changes in article 1 of Law No. 11,478/07, which establishes FIP-IE and FIP-PD&I, considerably expanding the list of infrastructure projects, as indicated below.
According to the congressmen, the most efficient way to attract legal entities and institutional investors would be precisely through the tax incentive to the issuers, which could pass it on through the payment of better remuneration to investors. The result is that infrastructure debentures may be issued with more attractive interest rates than other capital market papers.
Therefore, pursuant to article 3, the bill proposes taxation on income from the issuance of infrastructure debentures by means of withholding income tax at the rates provided for in Law No. 11,033/04, and with the possibility of deduction in the case of legal entities taxed on the basis of actual, presumed, or pre-set profit.
The applicable rates would therefore be 22.5%, 20%, 17.5%, and 15%, considering the maturities of the debentures, respectively: less than 180 days; between 181 and 360 days; between 361 and 720 days; and more than 720 days. Unlike incentivized debentures, there no zero percent rate will apply to income earned on infrastructure debentures.
According to article 6, legal entities that issue infrastructure debentures may deduct, for purposes of calculating net profit, the amount corresponding to the sum of interest paid in a given fiscal year and also exclude from the profit, in calculating the actual profit, and from the calculation basis of the Social Contribution on Net Profit, an amount corresponding to 30% of the sum of interest paid in a given fiscal year. This deduction may be increased to 50% of the amounts raised by the issuer if the debentures are intended to finance sustainable development projects (greenbonds).
Greenbonds, duly certified according to international standards, refer to projects for: (i) sustainable energy, including production of products and supplies; (ii) energy efficiency; (iii) pollution prevention and control; (iv) biodiversity conservation; (v) clean transportation; (vi) sustainable water management, including wastewater treatment and drainage systems; (vi) sewage and solid waste management; (ix) adaptation to climate change; (x) eco-efficient products and technologies; and (xi) green buildings.
The withholding tax rule will also apply to investments in debentures made by FIP-IE, FIP-PD&I, and FI-Infra (Infrastructure Investment Funds). The objective is to encourage investment by capital market player, without, however, granting a double tax benefit to these investors, that is, to the issuer and final investor. This avoids relinquishment of tax by the Brazilian government.
Changes in Law No. 11,478/07
The bill amends article 1, head paragraph, of Law No. 11,478/07 to include, alongside infrastructure projects, social infrastructure projects. It also proposes to include infrastructure projects implemented in the areas of public lighting, energy efficiency, solid waste, prisons, socio-educational units, educational units, health units, oil and natural gas, telecommunications, environmental conservation units, housing, urban mobility and logistics, in addition to energy, transportation, water and basic sanitation, irrigation, and other areas considered a priority by the Federal Executive Branch, already mentioned in the original draft, as amended by Law No. 12,431/11.
Another important change proposed by the bill is removal of the requirement to create segregated projects for the expansion of existing projects, be they those already implemented or those in the process of being implemented, which would considerably reduce bureaucracy and facilitate fundraising for projects to expand existing infrastructure.
There are also other proposals regarding the possibility of FIP-IE and FI-Infra investing in projects subject to re-bidding, extended, or initiated before the enactment of Law No. 11,478/07, regarding extension of the period for payment of shares and classification of funds, and regarding change in the reference value applicable to FI-Infra.
Changes in Law No. 12,431/11
The creation of infrastructure debentures does not prevent the issuance of the incentivized debentures, which remain valid, but the bill proposes the following changes in the rules for issuing incentivized debentures:
- Amend paragraph 1 of article 1 of Law No. 12,431/11 to expressly state the possibility of remuneration of incentivized debentures per pre-fixed interest rates, including linked to price indexes, foreign exchange rate variation, Interbank Deposit Rate (DI), or the Reference Rate (TR). This provision removes legal uncertainties related to the remuneration of debentures, such as those generated by the subsistence of Precedent 176 of the STJ: “Contractual provisions subjecting debtors to the interest rate disclosed by Anbid/Cetip are null and void."
- Paragraph 1-C of Law No. 12,431/11 would now consider all projects listed in article 1 of Law No. 11,478/07 as being priorities. Paragraph 1-D would include in this list partnership agreements that are subject to extension or bidding, pursuant to Law No. 13,488/17. The measure would help to cut the red tape for procedures for financing the expansion of Brazilian infrastructure.
- Still with regard to the classification of infrastructure projects as priorities, article 14 of the bill stipulates that the issuance of incentivized debentures, referred to in article 2 of Law No. 12,431/11, will not require a ministerial act to evaluate the projects, it being sufficient for the venture to be carried out in one of the sectors listed in article 1, paragraph 1, of Law No. 11,478/07.
Other legislative changes
Among other changes, the bill also proposes amendments: (i) in article 8 of Law 11,079/04 (PPP Law), with the possibility of providing security for financing by financial institutions that are controlled by the public authorities, provided that such financial institutions are not dependent on the public budget; and (ii) in article 32 of Law No. 11,712/12, in order to increase the limit of participation of the Federal Government’s guarantee fund to the amount of R$ 16 billion, for coverage of risk from operations dealt with in article 33 of the same law.