Brazil uncertainty paralyses progress -- Financing problematic as entire timetable slips

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Brazil's government has selected the first 1100 MW of wind power projects for its renewable power program, Proinfa, but serious uncertainties linger on, threatening the entire program. Investors are saying that the effort of getting this far will be wasted if government does not resolve some key structural issues, primarily related to financing and the specified construction deadline.

The most pressing concern is the modification of the terms of financing from the National Economic and Social Development Bank, or BNDES, says Ricardo Pigatto, president of the Association of Small and Medium Electric Power Producers, or APMPE. The bank, which said it will finance up to 70% of the costs of Proinfa projects, was originally scheduled to lend money directly to investors at its basic long term interest rate, plus a spread of about 3.5% a year. But BNDES is now proposing to provide credit lines through private sector banks, which drives up the cost as banks add on their own spread, says Pigatto.

High interest rates in Brazil, with the benchmark lending rate running at 17.75% a year, compared to as low as 2% in Europe, are also making it complicated, if not impossible, for Proinfa investors to raise the needed capital by securitizing future revenues from the power plants, says Pigatto.


The problems with financing are interfering with the rest of the components of Proinfa. All 3300 MW of phase one projects must come online by December 30, 2006, or face exclusion from the program. But without financing, investors cannot order their turbines and the deadline is rapidly approaching when it will become physically impossible to build the plants. "This deadline is like a sword over our heads," says Pigatto.

The uncertainties are also affecting equipment suppliers, who cannot proceed with the needed expansion of local manufacturing capacity, says APMPE's Pedro Cavalcanti, who also heads Brazilian operations for Spanish wind company Gamesa. The only wind turbine manufacturer with an established presence in Brazil to date is Germany's Wobben Windpower, an offshoot of Enercon. Other wind turbine suppliers, including Gamesa, General Electric, Vestas and Nordex, are contemplating setting up operations in Brazil as well as building local partnerships for certain components, but cannot proceed until they have firm orders, Cavalcanti says.

Problems compounded

These obstacles are compounded by question marks over phase two of Proinfa, says Cavalcanti. According to APMPE, phase two could account for construction of some 1300 MW a year of renewable power capacity in Brazil from 2007, meaning a steady flow of revenues for long term business plans. But given the problems with phase one and with key questions still needing clarification on phase two, investment decisions are being delayed.

With limited supplies of equipment and the growing pressure on timetables, the entire Proinfa program is being undermined by the inevitable rise in overall project prices, Pigatto points out. While wind plants were based on costs of approximately BRL 2.8 million per megawatt installed, prices have risen above BRL 3.2 million/MW ($1.7 million), he says.

Despite these concerns, some investors are confident they will be able to proceed. A number of alternative sources of funding, both on the equity and loan fronts, are emerging. Ailton Ricaldoni Lobo, president of New Energy Options, has turned to the development bank for the north-east of Brazil, BNB, which has set aside $175 million for electricity projects, including wind plants, in its region. Because of its geographical specialisation, BNB can tailor its loans more accurately, Lobo says.

Even so, New Energy is also seeking 20% from BNDES and has lined up a number of possibilities for covering the remaining 30% equity investment. The firm has not yet picked a wind turbine supplier, though Lobo acknowledges talks with General Electric.

A number of private equity firms in Brazil are also seeking to tap into Proinfa projects. EcoEnergia Fundo de Investimentos is in the process of raising BRL 120 million ($44 million) from pension funds, institutional investors and wealthy individuals to invest in Proinfa projects and renewables in general. The fund should be operating with its first BRL 50 million in the first quarter of 2005. It has already pre-selected some projects, says Ricardo Szlejf of Sao Paulo's Ecoinvest, one of the fund managers. Because of high Brazilian interest rates, the firm is looking for an internal rate of return on projects at the level of the IGP-M index, currently 7%, plus a spread of between 15% and 18% a year, Szlejf says, adding that the fund will also be looking to use carbon credits to improve returns.

Wind plants that have not made it into the first phase of Proinfa were still waiting for the government to select the final list of projects for biomass, which fell short of the 1100 MW allocation to each technology: wind, biomass and small-scale hydroelectric power. Just 350 MW of biomass projects have been selected so far, though the mines and energy ministry received more than 1100 MW of proposals on November 19. Many expect a number of those projects to be disqualified. The government has said it will award any leftover capacity to wind and small-scale hydro, based on a "first come, first served" basis from when the initial environmental license was awarded.

Among the hopefuls is New Energy Options, which was awarded only part of its bid for a Proinfa contract for 100.8 MW of wind plant in Rio Grande do Norte state. Lobo believes that if there is some more room for wind power, his project allocation may rise from his current 64.7 MW.

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