Opportunities for Sustainable Infrastructure Investments at City Level in Brazil
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Opportunities for Sustainable Infrastructure Investments at City Level in Brazil
Opportunities for Sustainable Infrastructure
Investments at City Level in Brazil
Opportunities for Sustainable education activities in the second infrastructure. Integrating climate
Infrastructure Investments at semester of 2018. Once a potential resilience into its portfolio will
City Level in Brazil project pipeline is identified, a wider accelerate the delivery of infrastructure
report will be produced identifying for climate risks mitigation.
This project is being implemented under
market barriers and the detailed
“InfraInvest: Sustainable Infrastructure • Incorporate climate risk exposure to
regulatory and policy recommendations
for Brazil” and has been commissioned new infrastructure plans, accounting
to unlock investment potential. A pilot
by the Brazilian Federal Government, for future depreciation of assets due
case will also be identified in 2019, to be
through the Ministry of Planning, to change in precipitation patterns,
showcased to investors.
Development and Management and is temperature increases and extreme
being supported by the Inter-American weather events.
Development Bank (IADB). Preliminary Recommendations • Prioritise green infrastructure
The project will seek to identify green • Include climate resilience as a further debentures issuance. They are
finance opportunities for cities in water priority sector in COFIEX’s list of currently more appealing to individual
and sanitation, waste to energy and urban themes for granting municipalities investors, since the Brazilian
mobility. These sectors have been selected easier access to external finance. government is granting fiscal incentive
given the investment needs in Brazilian to these investors for this debt
• Integrate climate resilience into
municipalities and their alignment with instrument.
Investments Partnerships Programme
low carbon development and resilience.
(PPI) portfolio. The government’s • Partner with development entities,
This brief will be used to raise awareness program incentivises the partnership which can help leverage financing and/
across key infrastructure stakeholders between public and private sectors or reduce the risk of infrastructure
in Brazil, and build a number of market as well as the privatisation of public projects.
Brazil’s Green Investment Potential
Brazil has an estimated US $1.3 trillion economic risks at a national level, which can local governments to finance debt only with
green investment potential for power, result in severe economic losses. authorisation and guarantees structures
transport, buildings, waste and industrial from the federal government, who not only
The current urban infrastructure finance is
energy efficiency,1 based on its climate has a limited percentage4 of its net revenues
mostly limited to public financing, such as
commitments set out in the Nationally to offer as a guarantee, but has also been
via BNDES, or individual investors who buy
Determined Contribution (NDC). The bulk covering the debts of a number of defaults
incentivised infrastructure debentures due
of this is in renewable energy and urban from its subnationals, in the last years. Such
to a tax benefit. At the same time, Brazil has
infrastructure including transport and waste. changes on the regulatory environment
hundreds of billions of dollars in assets under
have also provided an opportunity for
Investing in low carbon climate-resilient management by institutional investors,
establishing innovative mechanisms, such as
infrastructure as well as being required to particularly pension funds, which are
concessions and PPPs for key public services
meet NDC targets, is also an opportunity to traditionally allocated in government bonds.
and infrastructure development, particularly
establish a sustainable growth path, as set
Integrating climate mitigation and in the transport sector. In these cases, the
out in the Sustainable Development Goals
resilience criteria into mainstream infrastructure company can implement
(SDGs) around cities (SDG 11) and clean
infrastructure planning will provide Brazil high value projects with a less bureaucratic
water and sanitation (SDG 6).
with the opportunity to access new capital access to funding. On these Public-Private
With over 400 municipalities located along flows that are looking for green, especially Partnerships, private companies are given
the coast, more than 50 mn2 Brazilians are on the international market. Financing the duty to build a public infrastructure
directly vulnerable to the impacts of climate infrastructure is currently a challenge for or provide a public service backed by a
change in the coming decades, and so are Brazilian municipalities, which rely on special enhanced guarantee provided by
some of the country’s financial and industrial government transfers and tax revenues.3 the Government that can be used to collect
centres. Over 85% of Brazil’s population International credit operations have become resources in the financial market.5
currently lives in cities and the rapid tougher since the implementation of Law
expansion of the country’s urban conurbations 101/00, also known as the “Law for Fiscal
requires a substantial deployment of Responsibility”, which made the process
infrastructure over future decades. Failure for granting government guarantees
to incorporate climate change impacts for financing public infrastructure more
into infrastructure planning poses serious challenging. The current Law then, obligates
Opportunities for Sustainable Infrastructure Investments at City Level in Brazil Climate Bonds Initiative 2Green Bonds Opportunity in Brazil
Green bonds have the potential to mobilise Brazil’s market has been largely driven by the of Brazil’s key sectors and shift investment
substantial portions of the capital required pulp and paper and renewable energy sectors: towards a low-carbon economy.
to transform the country’s infrastructure
Implementing Brazil’s NDC7 under the Some of Brazil’s largest investors, representing
in support of a low carbon economy and
Paris Agreement will demand substantial R$1.8 trillion in AUM, have also come together
endure the risks of climate change.
investment. But with public spending and during this period and issued a Green Bond
Over the past few years, there has been a fiscal restrictions, crowding-in private capital Statement, making a public commitment to foster
steady growth in demand from Institutional will be essential to finance the NDC and a domestic green bond market. It is important
investors, particularly in OECD countries other infrastructure needs. Green bonds to develop a strong and bankable pipeline to
and China, for investment opportunities have the potential to leverage the strengths meet the local and international demands.
that address climate change and support
sustainable development. Evolution of the Global Green Bonds Market
This has resulted in the development of
160 Government-backed entity Loan
new financial products which include: green
loans; green, social and sustainable bonds; Local government Sovereign
green infrastructure investment trusts; and, 120 Development Bank
green index products.
Non-financial Corporate
Demand for sustainable 80 Financial Corporate
investments is increasing globally
ABS
Green bonds are debt instruments that raise
40
USD Billions
capital exclusively to finance or re-finance
projects and assets with environmental
benefits. The vast majority to date is funding
0
assets and projects that deliver climate change
mitigation and/or adaptation impacts. A small 2014 2015 2016 2017 2018
share of green bond proceeds is allocated to
assets and projects with other environmental Green bonds: Use of proceeds is diversifying
benefits such as preserving biodiversity; Energy Transport Waste Adaptation ICT
conservation of natural resources; and, air,
water and soil pollution control. Buildings Water Land Use Industry
Brazil’s Green Bond Market: US 100%
$4.4bn in issuance and growing6
75%
The first Brazilian green bond was issued
only in June 2015 and the market has grown
50%
exponentially since then, with 16 issuances
until July 2018. But this is only a small
25%
fraction of the investment needed and there
is significant potential for expansion,
particularly with urban infrastructure. 0%
2013 2014 2015 2016 2017 2018 YTD
Cumulative use of proceeds
Benefits for investors Benefits for issuers
Waste 3% Transport 1%
Buildings 4% ICT,
• Produce comparable financial returns • Provide an additional source of green
Water 5% AdaptationWhat’s green?
+ –
+ –
+ –
Waste to Energy: Solar: Public Lighting:
Treating residual waste with The world installed a record The value proposition of LED
various Waste-to-Energy number of new solar power street lighting is compelling
(WtE) technologies is a projects in 2017, more than from a cost, environment,
viable option for disposal of Municipal Solid net additions of coal, gas and safety and service perspective. Innovations
Waste and energy generation. There are nuclear plants put together. in lighting technology, systems and controls
many factors that will influence the choice now mean that street lighting is much more
UNFCCC
of technology and every region will have energy efficient, offers better quality light
to properly assess its specific context to and can help local authorities save money,
implement the most reasonable solution. while improving the services they offer their
constituencies.
World Energy Council
UN Environment’s United for
Efficiency (U4E) Initiative
Opportunities for Sustainable Infrastructure Investments at City Level in Brazil Climate Bonds Initiative 4Transport (rail): Water: Buildings:
75% of the world’s countries The UN says the planet Building-related emissions
have established strategies is facing a 40% shortfall account for about one-third
and targets to improve the in water supply by 2030, of global GHG emissions and
environmental performance of their transport unless the world dramatically improves the could double by 2050, making building
sector within their Intended Nationally management of this precious resource. efficiency a critical part of the COP21
Determined Contributions (INDCs). agenda.
UNFCCC
One-fifth of the transport-related (I)NDCs
GreenBiz
include measures in the railway sector.
UNFCCC
Opportunities for Sustainable Infrastructure Investments at City Level in Brazil Climate Bonds Initiative 5Green Infrastructure Investment
Opportunities in Brazil
This section provides an initial assessment of
Brazil’s sustainable infrastructure opportunities Examples of Green bonds for water
for different sectors. This project has selected
USD17 billion has been raised through green Green bonds for water infrastructure are
three key sectors based on their green
bonds to fund water projects since the appearing across different geographies and
investment potential and their city-level impact.
market’s inception. Issuance is predominant are expected to grow in emerging markets,
Further to these three sectors, Brazil in the US and Europe, with corporate issuers as water stress is a key issue in several
has a substantial green finance project mainly active in the UK and France while developing countries. In July 2017, the City of
pipeline across other sectors; like local governments dominate the US market. Cape Town issued a green bond for ZAR1bn
buildings, agriculture and energy. The Water is in the fact the largest sector of (USD77.2mn). The bond was 4 times
results of this project will certainly generate investment of US municipalities through oversubscribed and received interest from
co-benefits for leveraging project pipelines green bond issuance.15 31 different investors. The proceeds were
across the economy. used to refinance projects for sustainable
Alongside municipalities, public utilities can
water management and sanitation projects,
Internationally aligned green definitions also raise finance through green bonds for
including water capture, storage and
water and wastewater projects. In May 2016,
The “green” definitions used to identify distribution infrastructure and alternative
the San Francisco Public Utilities Commission
eligible assets in this report are taken water treatment plants, supporting the
issued a USD240mn for wastewater and
from the Climate Bonds Taxonomy, an city in reaching its climate resilience and
storm water management projects. The
international science-based classification social targets. The bond was certified
bond was the first certified against the water
system for climate investments. against the Climate Bonds Standard.
criteria under the Climate Bonds Standard.
1. Water and Sanitation
Estimates show that R$317bn
Currently, the sector is mostly supported by 2. Sustainable Waste
(approx. USD 82bn) in
public finance, which has a mandate to cover up Management
to 95% of financeable items,9 recently up from
investments would be required An estimated R$11,6 bn/
80%,10 but in practice a substantial gap remains.
until 2035 to ensure universal water and yr (approx. USD 3bn) in
sewage treatment to all Brazilians. Potential eligible assets: infrastructure investments until 2031 is
needed to ensure universal sustainable
In 2017, Brazil invested R$9bn into water and Sustainable water management: assets that
waste management in Brazil.11
sanitation. Nearly half of all Brazilians do not either reduce or have a neutral impact on
have access to sewage systems or treatment greenhouse gas (GHG) emissions over their Municipalities are planning projects to
and 35mn people do not have access to lives; support climate adaptation; or increase introduce and improve waste management
drinking water. Brazil’s water system has the resilience of surrounding watersheds. services in order to implement the revised
an average loss rate of 37%, a cost of 2010 policy.12 So far 40% of the necessary
This could include the following assets and
approximately R$8bn, due to leakages, poor landfills have been rolled out and this new
projects: water capture and collection, water
management and theft.8 policy presents an opportunity to ensure
storage, water treatment (with methane
any new waste management systems are
The implementation of sustainable water capture and energy recovery), flood defence,
sustainable and maximise materials and
and sanitation systems would increase drought defence, storm-water management,
energy recovery.
water security and resilience in the country, and ecological restoration/management as
and green finance could be an alternative well as grey, or built water infrastructure and One of the main implementation challenges
source of capital for the sector. nature-based water infrastructure. is finance. Municipalities have to operate
within the current fiscal regulations limiting
their ability to fund discretionary capital
SANASA (Campinas Water and Sanitation Company): projects. Sustainable waste management
could offer a regular source of revenue
SANASA is a concession company finished the construction of a new water
from materials recovery and energy sales.
responsible for the water management of reservoir that, besides preserving 160 acres of
It can also reduce the level of freshwater
the city of Campinas, located in the state of forests, will guarantee the city water supply
contamination from the leachate run-offs
São Paulo. SANASA is known for being one for the next 50 years. These investments have
from poorly operated waste handling.
of the most efficient water and sanitation already proven to reduce emissions and will
companies in Brazil, employing state of also provide climate resilience. It has made Demand for waste-to-energy facilities in
the art technology to treat and produce the city of Campinas less dependent on São Brazil are likely to rise, as dumpsites are
reclaimed water. It provides drinking water Paulo’s Cantareira Supply System, which gradually being phased out, mandated by
to 99,7% of the city’s inhabitants, with has suffered significantly since the extreme federal legislation, through Law 12.305/10
technology to ensure 99% purity in a drought that hit the southeast of Brazil which establishes the National Waste Policy.
chemical-free treatment process. between 2014 and 2015. Investing in waste-to-energy facilities can yield
both environmental and financial benefits.
SANASA was also the first company in the Investments such as these are eligible for
These facilities mitigate GHG emissions by
country to have a Production Station for Certified Green Bonds and could directly
generating energy from landfill gas; reducing
Reclaimed Water (EPAR). In 2017, SANASA benefit from green finance flows.
waste; and promoting reuse/recycling
Opportunities for Sustainable Infrastructure Investments at City Level in Brazil Climate Bonds Initiative 6practices. They also create new revenue
Examples of Green bonds for low carbon transport
streams (or savings) for municipalities as
they sell off excess energy into the grid. Transport currently accounts for only refinancing of metro, light rail and BRT
15% of green bond investments to date, construction and maintenance projects.
Implementation of such systems would
but has been identified as the largest
certainly benefit from accessing green • Water and wastewater management:
sector for market growth, as shown by a
finance markets, provided local regulatory MXP 538 mn for new projects for
recent analysis of climate-aligned bonds
and finance constraints can be overcome. construction or replacement and
that could carry a “green” label, with
maintenance of drainage and water
Potential eligible assets: USD505.4bn outstanding bonds.19 Issuers
capture systems, water treatment
include large railway corporations in
Sustainable waste management: projects to plants, wells and distribution canals for
China, Europe and US. Transport is also an
divert discarded goods from the entering the drinking water.
important theme in the local government
waste stream either by reuse or recycling,
green bond universe, where it constitutes • Energy efficiency: MXP 65 mn for new
projects to enhance the collection of
37% of the market share. installation and maintenance of street
municipal solid waste and the separate green
LED lighting.
waste projects to convert the residual waste Outside of Europe and the US, Mexico City
into waste-to-energy facilities. issued its first green bond in 2016 largely Alongside municipalities, transport
to finance new and existing low-carbon authorities can raise green bonds to
Where waste must go to landfill, there are
projects. The MXP 1 bn (approx. USD 50 finance low-carbon urban infrastructure.
gas capture systems installed to minimise
mn) 5-year bond was 2.5x oversubscribed; The New York Metropolitan Authority has
emissions as well as measures to minimise
the external review was carried out by identified a USD 11 bn portfolio of eligible
run-off and other negative impacts on
Sustainalytics. Eligible projects were projects (certified against the Climate
surrounding environments.
identified for MXP 1.35bn, including: Bonds Standard) against which it regularly
issuing green bonds to finance the
• Low carbon transport: MXP 187 mn of
maintenance and repair of the New York
Sustainable Waste new metro equipment and MXP 560 mn
metro transport system.
Management in Curitiba
All of Curitiba’s waste is disposed
of in landfills, in compliance with
transport’s GHG emissions. There are rolling stock or related infrastructure is not
the National Waste Policy.17 One of
opportunities for local governments to fully dedicated to the transportation of coal,
these landfills, located within the
expand and enhance of its public mass- oil or other fossil fuels); Bus Rapid Transit
Metropolitan area features sewage
transit systems (bus or subway) displacing (BRT) systems; electric vehicles; and, bicycle
treatment and systems to prevent leaks,
car-based transport: this can free up the transport systems.
as well as biogas capture for electricity
bioethanol for alternate uses.
generation. The municipality is now
proposing to add recycling to the waste The electrification of transport systems,
Low Carbon Transport
management contracts18 as there is eligible green assets under the Climate
Systems and the city of Belo
significant scope to expand. Bonds Standard, is a reality and will see
a steep rise in demand in Brazil over the
Horizonte:
A recently approved municipal law,
coming years. The National Electricity Belo Horizonte has a 2030 Urban
Law 15277/18, allows for the use of
Regulator (ANEEL) has issued regulation Mobility plan16 which was launched
municipal public assets (namely public
on provision of charging services for in 2017. It focusses on promoting the
buildings and land) to be used for
electric vehicles,14 with 2025 as the transition low carbon systems and
renewable energy generation, including
deadline for EVs to surpass internal minimised environmental impact. Some
from residual biomass (i.e. from organic
combustion engines, in terms of economic of the measures include:
waste, for example).
competitiveness, as estimated by industry
• Prospecting and promoting the
associations and manufacturers. With
substitution of the public transport fleet
the increase in the production of biofuels,
with more carbon efficient vehicles;
3. Low Carbon an expansion of biofuel/electric hybrids is
Transport Systems already a reality and could replace mass- • Ensuring the harmonization
transit vehicles in the short term, crucial for of environmental policies and
Estimates show that Brazil
urban mobility. commitments with the city’s urban
has a U$209bn climate-smart
mobility planning.
investment potential in urban transport Potential eligible assets:
infrastructure by 2020.13 These include As an example, electric buses are being
Low carbon transport: transportation modes
rail, mass-transit systems, and further tested for additional lines in the capital.
and ancillary infrastructure that produce low
adoption of biofuels in road transport, the Financing for this expansion of Urban
or no carbon emissions, as they are powered
predominant system in the country. Mobility could be eligible for green
by renewable energy or fuel sources. This
finance, with the potential to accelerate
Uniquely, a large proportion Brazilian cars can include national and urban passenger
green infrastructure deployment.
use bioethanol, greatly reducing road rail and freight networks (where freight lines,
Opportunities for Sustainable Infrastructure Investments at City Level in Brazil Climate Bonds Initiative 7Challenges of funding green
infrastructure in Brazil
In this section, we set out the basic • making the underlying economics of
challenge facing investment in green environmental infrastructure projects
infrastructure in Brazil. more attractive,
The country suffered a serious economic • attracting private capital into the
downturn between 2014 and 2016 causing infrastructure provision at terms that are
a 7% drop in output and unemployment mutually advantageous to the state and
rose from 6.8% to 11.3%.20 Since then there the private firm.
has been a mild recovery, GDP grew 1% in
It is essential that policy changes address
2017; however, this has not reversed the
the underlying economics of environmental
deterioration in government finances. Non-
infrastructure projects in waste, transport
financial public-sector debt rose sharply
and water through ensuring robust revenue
between 2016 and 2017 from 78.3% GDP
streams/grants so that enable projects to
to 84%. The worsening public finances
generate sufficient revenue to pay the costs
has resulted in a deterioration in its credit
of debt service and operations. At present
rating which S&P down-graded in January
domestic waste collection and disposal is
2018 to BB-. Moody’s gives Brazil a rating of
not revenue generating and fares from mass
BA2. These low credit rating means Brazil’s
transportation systems are inadequate
sovereign debt is not investment grade.
and so either need to be increased, or
The fiscal deficit has been particularly acute supplemented with other revenue streams.
at the sub-national government level. By
Given the restrictions on sub-national
2016 local government revenue had declined
government spending, authorities have to
to around 12% of GDP, but expenditure had
rely on alternate structures for organising the
steadily risen to around 18% – a substantial
provision of public services to bring in private
structural deficit caused in large part by
sector capital. Two specific approaches will
excessive spending on personnel and staff
be analysed:
pensions. Central government has reigned
in local government spending by introducing • Concessions e.g. private firms that have
tight controls on municipal spending and been given exclusive rights to build and
new borrowing in the Fiscal Recovery Bill, operate infrastructure (e.g. private water
freezing new hiring, forbidding new credit and sanitation companies such as AEGEA,
loans outside the framework of the state’s BRK Ambiental, etc), and
Fiscal Recovery Plans.21
• Partnerships in which a sub-national
The political difficulties of implementing government and the private sector form
spending cuts is illustrated by Rio de Janeiro’s a jointly managed entity to fund, build
efforts to reduce transport subsidies. The and operate the infrastructure (e.g. PPPs
subsidised fare program was suspended in for metro lines and other urban mobility
December 2016 because the state program projects in various cities such as São
was unable to pay the R$10mn subsidy for the Paulo, Rio de Janeiro and Salvador).
concessionary fares. Such a suspension would
Both of these structures would allow the
have impacted 5mn people every day. Under
investment project to borrow money or
political pressure the state reinstated the
issue a bond that is off the sub-national
reduced fares promising to liquidate the debts
government’s balance sheet. For this to be
owed to the transport company.22
viable it is important that the underlying
These restrictions on sub-national investments have robust cash flows capable
governments have meant they have of servicing the loans.
had to prioritise non-discretionary
We consider that the use of green bonds
spending programmes like education,
could play an important and beneficial
over discretionary expenditures on new
role to assist sub-national governments’
infrastructure. However, states still need
investment objectives. Green bonds’ clarity
to invest in new infrastructure for water
towards how proceeds will be spent, offers
and sanitation, waste treatment and public
investors greater certainty and transparency
transport if they are to improve the quality of
through the verification process that money
lives of their citizens.
is not misappropriated. Green bonds can
Restoring state’s capacity to make also attract investment from a broader range
investments in essential green infrastructure of foreign investors that would not usually
within the confines of this tough fiscal invest in sub-national Brazilian debt.
situation means addressing two issues:
Opportunities for Sustainable Infrastructure Investments at City Level in Brazil Climate Bonds Initiative 8Accessing green financial markets:
green bonds and loans
There is strong investor demand for entirely absorbed by retail investors as an If emissions and climate resilience were also
green bonds, which are consistently attractive form of investing in capital markets. incorporated into these criteria, municipalities
oversubscribed. This rapidly growing market could leverage international investment
However, this has also meant that institutional
has the potential to help cities attract new looking for green assets. Municipalities could
investors have stayed clear of buying
investors interested in high-quality low- therefore take advantage of existing pools
incentivised debentures given they are not
carbon and climate-resilient infrastructure of capital seeking to invest in sustainable
eligible for the tax benefits. Also, government
investments. With the growth of climate infrastructure, which will outperform fossil
bonds offer a “safer” risk/return profile than
related financial disclosure, investors and fuels and traditional forms of infrastructure,
most financial products available in Brazil.
asset managers are driven to increase their such as roads-based logistics.
Although, with decreasing interest rates,
exposure to green assets.
and mandatory ESG integration recently
Recent experience suggests the price of approved for national Pension Funds, through
the capital would be similar to that of resolution CMN 4.661/18, it is likely that
Green pooled funding for
conventional bonds with the same risk institutional investors will begin searching
municipalities
profile.23 This reinforces the importance of for good financial products in order to further
ensuring that the corporate structure that diversify their portfolios and comply with their Pooled funding for municipalities can
builds and operates the infrastructure has a fiduciary duty and local regulations. be an effective model for municipalities
robust and reliable source of revenue. It might to access capital markets to finance
For instance, ISA CTEEP, a private electric
also be necessary to access development urban infrastructure. The most effective
energy concessionaire responsible for
banks to provide credit enhancement to and efficient pooled funding model
transmitting approximately 25% of the
improve the project’s financial viability. entails aggregating municipalities’ debt
energy produced in Brazil, issued in April
operations and creating an independent
Green City Bonds fund green projects 2018, R$621mn in incentivized debentures
entity owned and/or backed by the
in cities, and can be issued to meet the labelled as green, to finance projects bided
municipality and/or central government.
investment requirements for climate-friendly between October 2016 and April 2017.
urban infrastructure, such as low carbon Local government funding
In February 2018, Copasa, the concession
buildings, metro rail systems, wastewater agencies (LGFAs)
company responsible for the water treatment
treatment plants and renewable energy. Local government funding agencies
and waste management in the state of Minas
(LGFAs) are a popular model in Northern
Gerais, issued R$268mn in incentivised
If you are an infrastructure debentures. This was used exclusively for
Europe and are the largest municipal
company: lender. The key advantages of LGFAs are:
infrastructure projects of basic sanitation in
Private companies and companies the sewage system of the municipalities of • Aggregation: by gathering a
operating under a government concession Divinópolis and Sabará. Projects like these large portfolio of projects, these
framework can access debt capital markets are likely to be eligible for green certification financial institutions can raise large,
to obtain upfront financing for green and benefit from a green issuance. international bonds.
investments. These companies could
• Resources and expertise: Centralizing
therefore issue green bonds to secure the If you are a Municipality:
resources and expertise enables
financing required for building the necessary
Climate Bonds Initiative is working with the the agency to develop and hire the
infrastructure at the local level.
Federal Government, through this project, appropriate expertise, overcoming the
Corporate bonds, or infrastructure in order to prioritise climate resilient capability barrier which may exist at
debentures in the local context, have infrastructure in concession portfolios as the municipal level.
accounted for most of Brazil’s green bond well as in external financing processes.
• Better debt pricing: the ability to
market so far. Brazilian issuers have reaped New projects should aim to consider
raise debt through capital markets
the benefits of accessing investors looking climate change impacts, particularly
and pass any pricing benefit onto
for green, including reputational gains, and regarding temperature rise and changes
the borrowers (and owners) can
investor diversification. in precipitation patterns, over the assets’
help municipalities access cheaper
working lives when calculating maintenance
Infrastructure debentures are one of the most financing for infrastructure projects.
costs and usable life.
widely used financing instruments in Brazil. Robust risk management and
Compared to traditional bank lending, they Currently, in order to obtain external finance, monitoring processes have also been
can generally offer lower funding costs, longer Brazilian Municipalities require authorisation a characterizing feature of LGFAs.
maturity, better guarantee requirements, from the Ministry of Finance and approval
The Nordic countries (Denmark, Sweden,
and also more attractive returns to investors. from the Senate. The Commission for
Finland, Norway) have demonstrated the
Since 2011, a new form of infrastructure External Financing (COFIEX) then reviews the
viability of this model for financing green
debentures became even more popular in the infrastructure proposals presented, including
urban infrastructure. All the Nordic LGFAs
Brazilian market; the incentivised debentures. by the local governments, according to the
have issued green bonds, with the largest
Regulated by Law 12.431, incentivised government’s priority sectors (divided into
issuer being Sweden’s Kommuninvest
infrastructure debentures exempt individual water and sanitation, R&D, environment,
(EUR2.3m) followed by Norway’s
investors from paying income tax, being the energy, urban mobility and development, and
Kommunlbanken, with EUR 2.2bn issued.
reason why this product has become almost logistics and transport).24
Opportunities for Sustainable Infrastructure Investments at City Level in Brazil Climate Bonds Initiative 9Municipal bond banks Subnational development banks in Brazil, bank guarantees, funding projects directly,
for example, could benefit from aggregating or arranging funding from other banks.
Municipal bond banks have been a dominant
portfolios of loans to green projects/
source of finance in the US and have also been 2. Capital Raising. This might involve issuing
sectors, known as green tagging, and
developed in Mexico. These are banks owned green bonds to institutional and retail
expand their lending capacity and therefore
and operated by state government agencies, investors or raising equity for special
further benefitting municipalities.
set up with the purpose of lowering the cost of purpose investment vehicles.
funding for municipalities. These banks issue Development banks aim to finance micro
3. Working with government agencies to
general purpose on the capital markets and and medium-sized companies for project and
find ways to reduce transaction costs and
redistribute the proceeds to municipalities program funding, and for the acquisition of
risk profiles of needed projects.
machinery, equipment and working capital.
Club deals
They are able to issue bonds and other 4. Industry mobilisation, in particular
Alternative to creating an intermediate lender, financial products as well as to collect third aggregating and packaging projects
municipalities can also cooperate through a party resources through term deposits and into investment vehicles suitable for
so-called “club deals”, i.e. raise a bond through international financing. institutional investors.
a common platform without creating an
BNDES is the primary Federal source 5. Negotiating government guarantees.
independent entity, leaving each participating
of development finance over the whole
municipality responsible for paying interests 6. Championing and facilitating low carbon
country. The Bank was founded in 1952,
and capital. This structure would still enable investments.
institutionalised by Law 1.628, and it works
municipalities that are not able to do so on
with its own statutory framework. 7. Providing advisory services for bond issuance.
their own, to access capital markets, but has less
cost efficiencies compared to creating an LGFA. It is supported by the regional development
banks, like the Bank of Northeast (BNB) and
At a minimum, and perhaps as a first step, Minas Gerais Development
Minas Gerais Development Bank (BDMG).
municipalities can create a network to coordinate Bank (BDMG):
their borrowing activities and exchange best The role of the development banks has become
BDMG, the regional development bank
practices, including raising a green bond issuance crucial to attract the private sector and
of the state of Minas Gerais, has also
through a pooled financing mechanism. enhance its partnership with the public sector,
already identified R$64,5mn (approx.
mostly within infrastructure financing. In a
USD17mn) in sustainable lending towards
If you are a bank: country where there is still need and space
infrastructure in its portfolio in 2017.26
for development, within a world that has
Green Finance also offers an opportunity for
been searching for ways to gather financial BDMG has a credit of R$762mn funding
banks and other financial institutions which
resources and solutions to the development infrastructure projects in 400 municipalities
oversee lending portfolios for being allocated
and implementation of the SDGs, Development from Minas Gerais. Through the financing
towards eligible assets, such as in the sectors
Banks have the opportunity to be the link of the municipal projects, the institution
above, renewable energy, energy efficiency,
between sustainability and development. also offers advice on the preparation of
sustainable agriculture and others.
proposals and guidance on the necessary
Green Lending:
documentation, becoming the official
Green Lending and other credit facilities structuring institution for concessions
provided by financial institutions will and PPPs in the state. For instance, the
Bank of the Northeast (BNB): function in the same way that traditional development institution partners with public
lending does, where the assets comprised in consortia, like Consane, which is the regional
The regional development bank, Bank of
the loans or the projects being financed are consortium of basic sanitation, formed by
the Northeast, through their FNE Program,
eligible. For example, BNDES’ and regional 8 municipalities, for structuring the urban
finances infrastructure portfolios from the
development banks’ LED lighting credit lines solid waste project in the municipalities,
Northeast region of Brazil, the North of the
could be considered a type of green lending. by contributing and accelerating the
state of Minas Gerais and the state of Espírito
Financial institutions can therefore expand process of public notice for PPPs.
Santo. In 2018, for infrastructure portfolios,
on the concept of green lending to provide
the bank had an approved budget of
more favourable conditions to green projects
R$14.5bn25 (approx. USD3.6bn), of which, by
and assets. Nonetheless, by fostering the
mid-August, R$6.275bn was already loaned. National Development Bank
implementation of more green lending
(BNDES):
In July, 2018, the Bank provided a credit streams in banks, municipalities can benefit
line of R$164,7mn to Cagece, a company with the expanded borrowing capacity for BNDES was the first Brazilian Bank to issue
of mixed economy responsible for the companies to implement urban infrastructure a green bond. Their USD1bn bond was listed
water and sanitation systems in the state services. on the Luxemburg Green Exchange in May
of Ceará. The funds were complementary 2017 with a 4.75% coupon, lower than
Public and commercial banks can integrate
to the total cost of project of R$235mn the 5.25% originally estimated. The bond
green investment throughout their operations,
for the improvement and expansion of the sought to refinance the bank’s solar and
where they can provide services on:
water supply systems in the municipalities wind portfolios and the use of proceeds
of Fortaleza, Maracanaú and Pacoti. 1. Origination and funding, such as will also go towards renewables projects.
structuring projects with government or
Opportunities for Sustainable Infrastructure Investments at City Level in Brazil Climate Bonds Initiative 10If you are a development entity: Attracting international 1. Cornerstone investments: where the
Though the public sector will remain a key
investment: public entity would take on a larger
number of shares or quotas on a particular
financier and a market driver in most of Development entities can act as catalysts
bond or fund;
these sectors, it is important to think about to enable green international investment
innovative and blended financial structures flows into Brazil. Two of the main challenges 2. Structuring dedicated funds: which
which will allow for a greater impact of in securing international finance for will prioritise sustainable infrastructure
limited public funds. If further developed, municipal infrastructure are: investments such as the Sustainable
these blended structures could overcome, or Energy Fund launched by BNDES;
i. obtaining a guarantee, either for the debt
minimize, the following current challenges:
itself or for the revenue stream, as in the 3. Providing guarantees: in the cases where
1. Country credit rating, case of PPPs; a near-total private sector investment is
feasible, but the lack of guarantees from
2. Currency fluctuations, ii. taking on the currency risk or providing
the Brazilian government prevents finance
the hedge, mostly for extreme currency
3. Provision of guarantees from the flows;
fluctuation.
government,
4. Leveraging aggregation platforms:
4. Longer payback requirements, Leveraging domestic capital: in order to facilitate access for
international investors, which are
5. Enforceability of urban projects’ There is also an opportunity to diversify
seeking for larger volumes, usually over
completion. the investor base towards infrastructure
200mn hard currency. By supporting
in Brazil through green finance. Most of
One of the strategies to manage these aggregation instruments such as
Brazil’s infrastructure is financed via BNDES,
challenges is mobilizing a developing entity financial securitizations, CRIs and LIGs,
which can be used as a catalyst for private
to support, at least in part, these projects’ it is possible to bundle a number of
investment, both domestic and international.
financing. A Multilateral Development infrastructure investments and therefore
Bank (MDB) is able to mitigate credit risk Actions: access institutional capital.27
exposure, protect investors from extreme
Public finance entities, especially development 5. Fostering innovative revenue streams,
currency fluctuations, and, to an extent,
banks (multilateral, national and sub-nationals), such as Land Value Capture (LVC): a model
the risk of non-payment of collaterals by
can step in to provide these assurance structures which has been little explored in Brazil to
a sovereign or sub-sovereign, through
working with private investors, who would date, where infrastructure investments
alternative products such as credit
contribute with the main capital expenditure trigger an increase in adjacent property
enhancement, or through backing the asset
for infrastructure investments. This can be values, which can be captured as part of the
guarantees. Additionally, the provision of
done through an array of instruments, such as: return on the infrastructure investment.
guarantees by a development entity can
lower the costs of transactions, make the
length of loan longer, as well as increase the What next? In the meantime, what is needed:
scope of activities of a project.
This project will carry out a number of a. Capacity building across stakeholders;
The Concession and PPPs model is local market education activities in the
b. Adjustment of regulatory requirements,
being largely used in Brazil to overcome second half of 2018 and early 2019, with
including the promotion of a standardized
budget constraints. MDBs attract private different partners. In parallel, Climate
Green Tagging approach for project
investment and domestic financial Bonds Initiative will also seek to identify
finance and integration of climate criteria;
institutions, which together, may not a green infrastructure pipeline linked to
have the capacity to offer longer tenure Brazilian municipalities, to be included c. Building investor capacity and mobilization,
for projects with a long payback times. in the wider final report alongside a list for institutional and retail groups;
Therefore, the participation of development of policy recommendations for unlocking
d. Further exploring the role of MDBs, moving
entities partially financing projects could investment potential.
beyond loans, which can include: the
enlarge the capacity for longer loans.
development of FX products, political
Another major problem for urban projects coverage and credit enhancement products.
in Brazil is the risk of the municipalities’
default and the breach of contract with their
Timetable
subcontracted private companies, which
can be aggravated if the project involves Identification of Regional market Publication of
the provision of infrastructure for basic Muni Pipeline education roundtables Synthesis Report with
livelihood, which, in this case, the contract August 2018 – November 2018 – Pipeline Analysis
cannot be easily interrupted by the latter. July 2019 April 2019 October 2019
The participation of MDBs therefore could
ultimately provide structures and products
such as guarantees to mitigate, to a certain
extent, the financial risks. AUG NOV APR JUL OCT
2018 2018 2019 2019 2019
Opportunities for Sustainable Infrastructure Investments at City Level in Brazil Climate Bonds Initiative 11Notes 1. Between 2016-2030, according to IFC, 2016. 2. Painel Brasileiro de Mudanças Climáticas, 2017, pg.74 3. There are three main revenue streams; transfers from the federal government, transfers from state governments, and municipal tax revenues. 4. RSF 48/2007 5. Justen Filho, Marçal. Curso de Direito Administrativo. São Paulo: Saraiva, 2005. p. 549 6. Until September 2018 7. Brazil’s NDC has been ratified by Congress and is now mandatory according to domestic legislation. 8. Instituto Trata Brasil. 9. Valor, 2018. 10. Governo Federal, 2017. 11. ABRELPE, 2015. 12. The National Waste Management Policy (PNRS - Law 12.305/10) establishes target and instruments to rollout effective waste management throughout the country. It instructs munici- palities to end all dumps, to be effectively replaced by landfills and also mandates that waste is appropriately managed by: reusing, recycling, composting, and generating or recovering its energy potential. 13. IFC, 2016. 14. ANEEL, Resolução Normativa n° 819, 2018. 15. Climate Bonds Initiative 16. PlanMob-BH 2030. 17. Política Nacional de Resíduos Sólidos. 18. Comissão de Meio Ambiente conhece sistema de geração de energia em aterro -May, 2018, 19. Climate Bonds Initiative, 2018 20. IMF (April 2018) “World Economic Outlook database” data extracted 23 October 2018 21. Brazilian National Treasury (2017) “Fiscal Recovery Regime” slides to OECD 22. How to fix the fiscal crisis in Brazil’s states? 23. Green Bond Pricing in the Primary Market: October - December 2017 24. COFIEX Resolution 01-2017 25. Valor, August 2018. 26. BDMG, 2017. 27. Though it will be necessary to develop parallel structures for offshore issuance as currently international investors either are not able or face challenging tax requirements in order to invest in these products in Brazil. www.climatebonds.net © Climate Bonds Initiative, December 2018 Disclaimer: The information contained in this communication does not constitute investment advice in any form and the Climate Bonds Initiative is not an investment adviser. Any reference to a financial organisation or debt instrument or investment product is for information purposes only. Links to external websites are for information purposes only. The Climate Bonds Initiative accepts no responsibility for content on external websites. The Climate Bonds Initiative is not endorsing, recommending or advising on the financial merits or otherwise of any debt instrument or investment product and no information within this communication should be taken as such, nor should any information in this communication be relied upon in making any investment decision. Certification under the Climate Bond Standard only reflects the climate attributes of the use of proceeds of a designated debt instrument. It does not reflect the credit worthiness of the designated debt instrument, nor its compliance with national or international laws. A decision to invest in anything is solely yours. The Climate Bonds Initiative accepts no liability of any kind, for any investment an individual or organisation makes, nor for any investment made by third parties on behalf of an individual or organisation, based in whole or in part on any information contained within this, or any other Climate Bonds Initiative public communication. Opportunities for Sustainable Infrastructure Investments at City Level in Brazil Climate Bonds Initiative 12
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