Brazil InfrastructurePAC 2 and Beyond

June 2010

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Infrastructure Highlights

PAC 2

2016 Olympic Games

Macroeconomic and PoliticalStability

2014 FIFA World Cup

Continuous Growth in Brazil

Pre-Salt Area

Huge Infrastructure Bottlenecks

PAC 2

Original PAC launched in 2007 – only 10% – 40% of projects concluded

In 2010, the Federal Government launched PAC 2, which estimates investments of approximately R$ 1,5 trillion (including some of the R$ 500 billion of PAC still pending) in the upcoming years

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Project Objective Areas of Focus Estimated Investment

Better City Tackle the major challenges facing large urban areas to improve quality of life

Sanitation, crime prevention in high-risk areas, urban mobility, paving

US$ 31.3 billion

Citizen Community Increase the availability of State services in poorer districts

Emergency care units, basic health clinics, daycare and pre-school centers, school sports facilities, community police stations

US$ 12.6 billion

My House, My Life Reduce the housing deficit, stimulate the civil construction sector, and generate jobs and income

Urbanization of informal settlements

US$ 152.5 billion

Water and Light for All Provide general access to water and electricity

Water supply in urban areas US$ 16.6 billion

Energy & Logistics

PAC 2

Practical Consequences of projects included in the PAC-2

Priority in BNDES financing and other governmental benefits

Planning improvement

Priority in the analysis of environmental licenses

Governmental task forces (public attorneys)

Marketing / political instrument

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2014 FIFA World Cup: Overview

Investments needed in all of the 12 selected cities (Rio de Janeiro, São Paulo, Belo Horizonte, Porto Alegre, Curitiba, Brasília, Fortaleza, Salvador, Recife, Natal, Cuiabá and Manaus)

Areas directly related to the 2014 World Cup:

construction or improvement of the stadiums, as well as their proximitiesrental and disposal of equipment (for example: vehicles, medical devices, identification and detection equipment)accommodation and leisure activities to the athletes of the participant countries, for the press and for the audiencepublic transportation (mass transportation as subways, bus rapid transit, trains and their required operational elements as avenues, bridges, among others)general services structures

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2014 FIFA World Cup: PPPs - Stadiums

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PPPs in 5 out of 12 of the selected cities

PPPPPP

PPP

PPP

PPP

Main Lenders: BNDES and BNB

2016 Olympic Games: Overview

Areas directly related to the 2016 Olympic Games (to take place in Rio de Janeiro):

construction or improvement of the arenas that shall held the Games

rental and disposal of equipment (for example: vehicles, medical devices, identification and detection equipment)

accommodation and leisure activities to the athletes of the participant countries, for the press and for the audience

improvement of public transportation used in the 2014 World Cup

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2016 Olympic Games: APO

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Federal Government

Federal Government

State of Rio de JaneiroState of Rio de Janeiro

City of Rio de Janeiro

City of Rio de Janeiro

APO(public 

consortium)

APO(public 

consortium)Brasil 2016Brasil 2016Services

Contract

Responsible for the planning, 

coordination and implementation of the civil works and 

services

Responsible for the planning, 

coordination and implementation of the civil works and 

services

PrivatePartiesPrivateParties

Federal Government

(Sports Ministry)

Federal Government

(Sports Ministry)

Original State Authorities

(State Secretaries 

etc.)

Original State Authorities

(State Secretaries 

etc.)

Assignment

$$(cost

reimbursement)Public biddings for public constructions; concessions; PPPs etc.

High Speed Train: Project Overview

Construction, operation and maintenance of a High-Speed Train system between Campinas/ São Paulo and Rio de Janeiro, with stations in Viracopos Airport, Guarulhos Airport, Jundiaí, São José dos Campos, Volta Redonda, and Galeão Airport

Integration between the two largest urban areas in Brazil and the improvement of their competitiveness, due to the reduction in the travelling time and in transportation costs

Possible path of the project:

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Barra Funda

São José dosCampos

Taubaté

ResendeVolta Redonda

Possible adjustment L = 256mi. (412 km)

L E G E N DA

TRANCORR RSC L = 281mi. (452 km)

Rio de Janeiro

PinheirosSão Paulo-Rio de Janeiro Length L= 256 mi. (412 km)

Campinas

Campinas-São Paulo Length L= 62,4 mi. (100,5 km) Based in the Ministry of Transportation High Speed Train Report

Barra Funda

São José dosCampos

Taubaté

ResendeVolta Redonda

Possible adjustment L = 256mi. (412 km)

L E G E N DA

TRANCORR RSC L = 281mi. (452 km)

Rio de Janeiro

PinheirosSão Paulo-Rio de Janeiro Length L= 256 mi. (412 km)

Campinas

Campinas-São Paulo Length L= 62,4 mi. (100,5 km) Based in the Ministry of Transportation High Speed Train Report

Concession Period: 40 years

Construction Period: 5 years

Start of Construction: 2010

Estimated value of investments: R$ 34 BI

• 10 bi: equity• 6,5 bi – private• 3,5 bi – gov - Etav

• 24 bi: debt• 21 bi – BNDES• 3 bi – ECA

High Speed Train: Key Issues

Concession Regime and the Proposed Bidding Structure

Concession agreement to be executed by a SPC to be formed by the winning bidder(s) and a governmental entityFinal bidding structure subject to confirmation once Bid is officially launched Preferred bidder criterion: lowest tariff (30%) and less public financing needs (70%)

Transfer of TechnologyNew technology of railroad services which is not known or controlled by the Brazilian Government, nor is necessarily accessible to private railroad concessionaires in Brazil

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Interested bidders:Japanese

ChineseKoreanFrench

German

Other Sectors & Financing

Other sectors of expected growth:Airports, Toll Roads, Energy, Urban Development, Ports, Sanitation

Main Financing Players:Governmental Banks: e.g, BNDES, BNB, BB/CEF, FI-FGTSMultilaterals: e.g. BID, IFC, CAFECAs: e.g. JBIC, KFWCommercial Banks: e.g. Santander, Bradesco, Itau-UnibancoInvestment Funds: e.g., FI-FGTS, InfraBrasil, etc.

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Financing Instruments:Financing (loan) agreements (syndicated, A/B loan, club deal, on-lending etc.)DebenturesCCBsFIDCsSubordinated loans

José Virgilio Eneile@machadomeyer.com.br

When You Think INTERNATIONAL,Think Fulbright.TM

Wednesday, June 16, 2010Brazil Infrastructure: PAC 2 and Beyond

801 Pennsylvania Avenue N.W. - Washington DC

Project Finance in Brazil:Tackling Risks - Funding Growth

Brian Bradshaw

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Brief Outline

Current state of global project finance

Brazilian Infrastructure Overview

Risk Analysis

Brazilian experience in oil & gas project finance

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Current State of Global Project Finance

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Project Finance Activity in 2009

Approximately 712 projects worth over $292.5 billion –9% decrease from 2008 when $320.9 billion were raisedLatin America accounted for 11.69% share of global volume in billions of dollarsLatin America accounted for 9.4% share of global volume in number of dealsBrazil accounted for 2 of the top 4 largest projects in 2009 and ranked 3rd in global volume in billions of dollarsOil & Gas accounted for 22% share of global volume of project finance by sector

Source: Dealogic Project Finance Review (January 11, 2010)

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Global Deal Volume 2000-2009

0

100

200

300

400

500

600

700

800

2000 2002 2004 2006 2008

No. Deals

Sources: Project Finance Magazine (Feb. 2007) and Dealogic Project Finance Review (2007-2010)

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Regional Analysis

North America$31.2 billion; 93 deals

Latin America/Caribbean$34.2 billion; 67 deals Australasia

$16.8 billion; 47 deals

Eastern Europe$10.8 billion; 16 deals

Asia$104.0 billion; 160 deals

Western Europe$54.3 billion; 265 deals

Middle East/Africa$39.7 billion; 63 deals

Source: Dealogic Project Finance Review (January 11, 2010)

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Brazilian Infrastructure Overview

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Infrastructure Overview –Transportation

Toll Roads● Investments: $18.5 billion through 2010 (PAC)● Main Projects: SP Ring Road South Section; 3rd phase of Federal

Toll Road Concessions Program; 2nd phase of SP Concession Program

Railroad● Investments: $ 4.4 billion through 2010 (PAC). National Logistics

Plan estimates that rail network maintenance and expansion will require $65.5 billion up to 2023 (Transportation Ministry)

● Main Projects: North-South Railroad (Transnordestina); São Paulo –Rio de Janeiro high speed train; municipal subway projects for the World Cup 2014

Source for PAC estimates: Brazilian Federal Government – PAC Investment Forecast in Logistics Infrastructure 2007-2010

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Infrastructure Overview –Transportation (cont’)

Airports● Investments: $1.7 billion through 2010 (PAC)● Main Projects: Concession of International Airports (e.g., Rio de

Janeiro & Campinas); expansion of Guarulhos airport / construction of a 3rd international airport in SP; concession of SP state airports

Ports● Investments: $1.7 to $2.8 billion through 2011 (private sector), $1.5

billion through 2010 (PAC)● Main Projects: Embraport; Porto de Açu; Tecon-SC; Concession

Santos Port expansion.

Source for PAC estimates: Brazilian Federal Government – PAC Investment Forecast in Logistics Infrastructure 2007-2010

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Infrastructure Overview – EnergyPower Generation● Investments: $36.6 billion through 2010 for the development and

construction of 12,386 MW through 2010 (PAC)● Main Projects: Santo Antônio (3,150 MW), Jirau (3,300 MW), Belo

Monte (11,182 MW), MC2’s Thermo Plants (4,200 MW)Transmission● Investments: $7 billion through 2010 adding 13,826 km of new

transmission lines to the Brazilian interconnected system (PAC)● Main Projects: transmission lines linking Madeira Complex (North

Region) to consumption centers, as well as projects connecting Manaus and Macapá (Amazon Region) to the rest of Brazilian transmission system

Distribution● Investments: up to $4 billion in 2009 to provide universal access

Source for PAC estimates: Brazilian Federal Government – PAC Consolidated Investment Forecast in Energy Infrastructure 2007-2010

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Infrastructure Overview – PAC2

Total investments of $881 billion

$605 billion for energy projects● $486 billion for oil and gas projects● $75 billion for power generation, including the construction of 54

hydro power plants

$530 billion to be invested between 2011 and 2014

Source: Brazilian Federal Government – PAC 2 Report (March 29, 2010)

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Risk Analysis

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Risk Identification: Commercial RisksConstruction riskCost overrunsDelaysEnvironmental risksFailure to meet contract specsFailure of subcontractorsFeedstock shortagesFluctuations in price of feedstock and off-takeLack of demand or revenuePhysical force majeureTechnology failureUnforeseen site conditions

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Risk Identification: Financial RisksChange in control of off-taker / project partner/counterparty

Currency exchange rates

Financial failure of off-taker / project partner/counterparty

Inflation

Interest rates

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Risk Identification: Political RisksBreach of contractChange in governmentChange in lawExpropriation / nationalizationInstitutional instability / legal uncertainty/change in lawPolitical violence (e.g., acts of war, terrorism, civil unrest)Public perceptionRestricted currency availability, convertibility and transferabilityRestricted repatriation of profitsUnavailability of proper government consents, permits, etc.Unreliability of dispute resolution procedure

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Risk Allocation: Contractual Devices

Completion (of construction) guarantees from sponsors

Guarantees by multilaterals/ECAs of repayment of loan if default caused by political risk

Commitments by off-takers to pay “capacity” charges (or equivalent) whether or not product supplied

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Risk Allocation: Contractual Devices (cont.)

Force majeure provisions● natural FM – usually covered by insurance● political FM – trend to ask for compensation from host government

Generally, material project risks are, as far as possible:● retained by host government● passed through the project company to:

ContractorsInsurersto a limited extent, shareholders

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Risk Mitigation: How?Mitigating risk occurrence in first place, and their effects when they do● effective due diligence● detailed country knowledge● good project managers on the ground● clear documentation with risk appropriately allocated● cost effective insurance for risks retained● good relationship with other transaction participants● independent (foreign) dispute resolution mechanismBut above all, sound project economics:● asset must be carefully verified● pricing must give the off-taker (upon whom the project economics

depends) the economic incentive to perform

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Brazilian Experience in Oil & Gas Project Finance

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First Generation Projects: Pseudo Project Financings

Projects of PetrobrasANP guidelines required significant expenditures for upstream activities or risk loss

of concessionsCapital expenditures restricted by Government budgetary limitationsBolivia-Brazil pipeline absorbed capital expenditure commitmentsDebt was limited by Central Bank restrictionsRegulatory regime prevented Petrobras from benefiting from international pricingPetrobras did not have regular, assured access to international capital markets

- Examples of projects: Barracuda, Cabiunas and Marlim

Background Leading to First Generation ProjectsBackground Leading to First Generation Projects

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SPC OFFSPC OFFSHORESHORE ECAs, Banks and ECAs, Banks and

BondholdersBondholders

SPC ONSPC ONSHORESHORE PETROBRASPETROBRAS

ANPANPOil / GasOil / GasProduction fieldProduction field

Funding

Debt

Rental/lease payments

Rental/lease agreement

OperationOil & Gas

ConcessioncontractAssets

mobilization

Equity, Supplycredit and

bank market AbroadAbroad

BrazilBrazil

Debt service

First Generation Projects:Pseudo Project Financings

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First Generation Projects: Pseudo Project Financings

Complex offshore leasing structuretax optimization (income and

withholding)Repetro regime

Multi-Sourced Lending ArrangementsOfficial and non-official lenders –

significant Japanese involvementDesigned to minimize direct funding

obligations of Petrobras

General CharacteristicsGeneral Characteristics

Few of the benefits of limited recourse financing. Risks are largely borne by Petrobras:

Completion riskOperating/reserve riskMarket riskPolitical risk

Most of the burdens of limited recourse financing:

Long lead/planning timeIncreased pricing, reflecting structural risksSignificant transaction costs

ObservationsObservations

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Second Generation Projects: Enhanced Corporate Credits

Petrobras and IOCs Joint Operation ProjectsDevelopment of new concession areasNYSE Listing of PetrobrasPetrobras Adopts US GAAP FinancialsIncreased Exposure to Foreign Rating AgenciesSuccess of First Generation ProjectsIncrease in Oil Prices

-Examples: Petrobras International Finance CO (PIFCo) created to purchase oil and oil related products from suppliers abroad and sell them to Petrobras on a deferred basis

Background Leading to Second Generation ProjectsBackground Leading to Second Generation Projects

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ECAs and BanksECAs and Banks

BRASOILBRASOIL

Equipment Equipment SuppliersSuppliers

Offshore SPCOffshore SPC

Loan Agreement

Supplier Contract

Loan AgreementRental

Agreement

Support Agreement

Second Generation Projects:Enhanced Corporate Credits

Offshore Financing Structure

Platform Platform OwnerOwner

PETROBRASPETROBRAS BNDESBNDES

BrazilBrazil

AbroadAbroad

CharterAgreement

Sub-CharterAgreement

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Second Generation Projects: Enhanced Corporate Credits

Issuance of notesHighly structured; designed to take

advantage of favorable tax and customs regimes

Pricing above sovereign ceilingStructured to enable multiple lendings

to ECAs, commercial lenders, bondholders, etc. (both insured and uninsured)

General CharacteristicsGeneral Characteristics

Political risk insuranceLower overall cost of fundingIncrease speed of project

implementationDesigned to minimize direct funding

obligations of Petrobras, but Lenders given a choice to proceed against offshore borrower or Petrobras

Initial involvement of IOCs

ObservationsObservations

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Next Generation Projects

Petrobras is an experienced and recognized issuer of debt and equity securitiesIOCs and other oil companies are heading to development phaseBrazil remains a net importer of light oilSignificant quantities of natural gas are necessaryFinancial stabilityCapital markets development (investment grade status)ANP increasingly viewed as a credible and transparent regulator

Background Leading to Next Generation ProjectsBackground Leading to Next Generation Projects

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Next Generation Projects

Securitizations:Benefits to Issuers- Longer maturities of debt- Improved risk management and balance sheet performance- Broader class of investors if transaction obtains investment grade rating

Limited Recourse Financings:Project company with Petrobras as equity partner is more likely to seek project

financing as a funding strategy:Examples in power sector (Aracauria, TermoRio, etc.)Examples in petrochemical projects (Rio Polimeros)

Types of Next Generation ProjectsTypes of Next Generation Projects

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Next Generation Projects

International Corporate FinancingsJoint ventures where Petrobras is not a participant are more likely to use corporate

financings as a funding strategy:Project financing may be too expensive and time consuming to pursue.Utilize home country bank relationships for bridge funding.

Development of local financing optionsDomestic capital marketsMore local financial institutionsPension fundsBNDES

Types of Next Generation ProjectsTypes of Next Generation Projects

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Next Generation Projects

Petrobras monopoly on domestic refining capacity and related infrastructure may deter investment in upstream activities

Potential infrastructure bottlenecks (e.g., ports, terminals, pipelines, etc.)Development of a faster and more efficient process for environmental licensesDiscussions about assignment of oil & gas concessions Discussions regarding tax expropriation by State Government (ICMS)

Principal Challenges for Next Generation ofPrincipal Challenges for Next Generation ofBrazilian Oil & Gas Project FinancesBrazilian Oil & Gas Project Finances

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