OREANDA-NEWS. March 25, 2016. Brazil's plan to lower finance costs by increasing Banco Nacional de Desenvolvimento Economico e Social's (BNDES) role in subsidized infrastructure lending may make the program more dependent on the federal government amid the country's economic volatility and political stalemate, Fitch Ratings says. However, the plan may also make certain infrastructure projects with lower internal rates of return more feasible and address some of the financial strain many potential sponsors see in Brazil's infrastructure.

The infrastructure program, which was announced last year, would have a better chance of success if it relied less on subsidies or guarantees from the government. Moreover, changes in project-specific economics, such as raising tariff ceilings and lowering minimum concession fees, could achieve similar results more efficiently.

The expansion of subsidized infrastructure lending is a reversal from the program's initial goals. Past subsidized-lending policies relied on the National Treasury and strained fiscal accounts. This time, the government claims that dependence on the National Treasury is unnecessary.

BNDES's current financing rate is 7.50% per year. The plan aims to lower all-in project financing rates by between 120 bps and 200 bps on water, railway, toll road, airport and port projects. The current and proposed rates are both well below Brazil's benchmark interest rate, the BACEN SELIC, of 14.25%.

The program could be marred by the fact that several local infrastructure sponsors are facing corruption charges within the Lava-Jato investigations and international sponsors face difficulties in finding reputable partners with local expertise. In addition, credit fundamentals at several operating infrastructure projects are likely to continue to decline over the midterm. Fitch expects Brazilian toll roads to exhibit weak traffic performance for the next 12 months, pushing concessions into the trough of the economic cycle. We also maintain a negative outlook on Brazilian airports based on the sluggish growth forecast beyond 2016 and its adverse impact on short- and mid-term credit metrics.

The government also announced market-oriented proposals that, in Fitch's view, could relieve some of the pressure on Brazilian project finance. A change to Law 12.431 could allow project companies to prepay or refinance Infrastructure Debentures. The inability to refinance them, along with their long tenors and the high price of government notes, has hindered their issuance. Another proposal to create a BRL500 million fund that would guarantee political and regulatory risks could have a positive effect on Brazilian infrastructure.