TEXT-Fitch says Brazil's infrastructure plan as execution risk

(The following statement was released by the rating agency)

Aug 22 - Fitch believes the funding for a set of infrastructure projects in Brazil hinges on choices the government will make to facilitate an efficient procurement process and spur the use of private equity and debt investment supported by financial programs and incentives from the Brazilian Development Bank (BNDES). An approximately $66 billion investment package was announced by President Rousseff on August 15. It calls for 10,000 kilometers (6,200 miles) of new railways and the construction or improvement of 7,500 kilometers (4,660 miles) of roadways. The president indicated that a port and waterway package is forthcoming. We believe the biggest challenge for these projects is how BNDES financially will structure them. Certain projects, like rail, will need large public subsidies, while roads and ports may need smaller subsidies. BNDES has already taken steps we believe are positive, including allowing concessionaries to finance up to 80% of the costs. However, we are concerned that unnecessarily large subsidies may be detrimental to the overall program. The tenor of the debt is also much longer than before. We expect it to be 20 years for the toll roads and 25 years for the railways. This is a positive if it spurs private sector debt tenors to follow suit. In the near future, one important factor will be how BNDES maximizes the use of alternative sources of capital so that it expands the country's capacity to accommodate the targeted level of investment. Subsidies often are required even for self-sustaining projects in the long-term, but minimizing those subsidies is critical to maximizing the benefit from the overall investment program. Changes like these (and others) will be necessary to attract private sector partners. In our view, it will also be important for these projects to be executed more quickly than past ones. The sale of concessions on several of Brazil's airports earlier this year was behind schedule. It will also be necessary to attract the right private partners because global demand for improved infrastructure is on the rise and competition from other countries for limited corporate and financial capacity will be significant. Countries that offer faster execution and, likely, fewer political risks, will benefit greatly. Overall, we are encouraged by the greater pragmatism displayed by the Rousseff administration in its approach towards infrastructure development. Policy announcements like these could attract private investment and signal that the government is shifting its focus from demand stimulus to measures that address some of the structural issues that inhibit Brazil's potential growth. If executed well, infrastructure development could boost investor and consumer confidence and improve competitiveness of the economy. Moreover, progress on infrastructure investment could spur economic growth over time. (Caryn Trokie, New York Ratings Unit)