Looking for Lenders!
Adriano de Marchi Fernandes, who holds a fellowship from the Alexander von Humboldt Foundation, conducts research at Freie Universität on the financing of major infrastructure projects in Brazil.
Jul 25, 2017
Hydroelectric power plants and wind-powered electrical generators, sewage treatment plants, and hospitals: Major infrastructure projects cost a lot of money. For many companies in Brazil it’s difficult to put in place the necessary financing to realize such projects. How would the financial market need to be structured to facilitate financing?
This is the issue that Adriano de Marchi Fernandes is exploring. Supported by a German Chancellor Fellowship awarded by the Alexander von Humboldt Foundation, this young economist is spending a research year at Freie Universität’s Institute for Latin American Studies.
Adriano de Marchi Fernandes has been dealing with Brazil’s infrastructure for a long time: Since completing his degree in economics in São Paulo six years ago, he has worked at a bank, for Siemens’ finance department as well as for a small business consultancy. Time and again, the focus of his work was on the financing of power plants and roads – in other words “infrastructure.” The world’s fifth largest country, Brazil is a newly industrialized country. Its economy, however, is faltering and Brazil is in urgent need of infrastructure investments. This Brazilian’s mission was to serve as a broker for so-called “bridge loans.” These are used to keep alive projects until their financing can be secured with a long-term loan.
But often these loans were not forthcoming. Adriano de Marchi Fernandes thus had to watch as promising projects could not be realized – the construction of a large sewage plant in the south of Brazil, for example. This project was a central component of the government’s pledge to provide nationwide access to potable water and sewage systems by 2033. “Our infrastructure threatens to fall behind,” the 33-year-old researcher laments. “This has serious social consequences and things are bound to get even worse if we can’t find a solution to the funding problems.”
The long-term financing that banks in Germany often provide to companies is uncommon in Brazil. And for large infrastructure projects, the financing hurdles are particularly high. According to Adriano de Marchi Fernandes, “It often takes 20, 25 years before they are implemented. Investors aren’t willing to wait that long. The amount of risk until the loan is repaid seems too great for them.”
Brazil has long been seen as unattractive for capital investors: A long recession has driven up inflation over the past years. As a consequence, interest rates in Brazil are among the world’s highest today. This crisis, the economist suggests, has also caused one of the biggest investors in infrastructure projects to become tightfisted: The National Development Bank (BNDES), which extended one third of all credits for Brazil’s infrastructure endeavors, has less and less money available to it. Companies that were dependent on BNDES have been forced to look for other sources of financing.
Adriano de Marchi Fernandes suggests that the key to easier access to money on the financial market could be, for example, project-specific bonds: Instead of applying for a standard bank loan, a company could create a sub-company for a major project that issues long-term securities and these could be traded openly by creditors. Apart from banks, such creditors are often pension funds and private individuals. This form of project financing, however, is still rare in Brazil. Why this is the case and how this could be changed is something that Adriano de Marchi Fernandes is examining as part of his research stay at Freie Universität’s Institute for Latin American Studies (LAI).
His research is being conducted under the supervision of Barbara Fritz, a professor of economics. According to Marchi Fernandes, “At LAI you will find both a good understanding of Latin America and contacts to individuals with whom I want to conduct interviews.” Such contacts include, for example, experts from the Kreditanstalt für Wiederaufbau (KfW), which funds Germany’s development cooperation with Brazil.
With its German Chancellor Fellowship, the Alexander von Humboldt Foundation (AvH) enables young leaders from Brazil, Russia, China, India, and the United States to carry out a one-year project in Germany at a host institution that the fellowship recipient is free to choose. According to AvH rankings on the distribution of its fellowship holders and awardees at German universities and research institutes, Freie Universität is one of the most popular research sites for AvH guest researchers from abroad.
The German Chancellor Fellowship also entails a study tour across Germany and an intensive language training program. For Adriano de Marchi Fernandes, who had already spent a study year abroad at Tübingen as part of his degree, mastering German is an important goal. “Knowing the language of your host country is important,” he says.