Project Finance in the Brazilian Petroleum Industry

Abstract

In order to cover the financial capability of Public sector in the emergingcountries, new ways of financing of the Public expenditure in infrastructureprojects need to be studied. This is the particular case of the PetroleumIndustry in Brazil. Perhaps, without private capital, both national or foreign, the BrazilianIndustry will never be able to support itself his own consumption demands. Therefore, the use of Project Finance (PF) modeling to meet an alternative wayto Corporate Finance, will be extensively used to substitute the governmentalrole of Public Investor, who, besides, doesn't have more capability to investintensively in Petroleum Projects. Some advantages brought throughout Project Finance is separation of theproject risk, by the creation of the SPC (Special Purpose Company), whoseaccount life has independence to the players of the project. Otherwise, thiskind of financial modeling is used in projects that require intensive amountsof capital, like oil and gas projects. So, despite the higher cost of capital, the Project Finance alternative can be extensively used to find out his ownsself-sufficient in the production of oil and gas. 1 - Introduction: the present Brazilian scenario Since the second oil crisis in 1979, which led to a substantial increase inoil prices on the international market, all oil importing countries have feltacutely their dependence on OPEP and the volatile political situation in itsmember countries. In order to reduce its dependence on this fuel, Brazil, among othermeasures, invested heavily in the Pro - Alcool program, seeking to substitutepart of its energy demand. For various political, technical and economicreasons, this program has now practically ceased to exist, with alcoholconsumption reduced to an insignificant portion of the national auto fleet. In parallel with the problems faced by oil in the international market, witheffect from the eighties there began in Britain a movement towardsprivatization, with the object of reducing the role of the state. In theory, this policy allows the government to concentrate on its basic functions such ashealth, education, security etc. This movement originating in Britain has influenced many countries, developed and emerging, leading them to develop various legal and financialmechanisms to ensure that the private sector participates as executor andoperator of infrastructure products in different segments. According to the analysis made by Velasco (1), privatization's in Brazilhave been made in two phases. The first, during the Sarney, Collor and ItamarFranco governments, focused on the privatization of industrial companies, aiming at reducing the government's role as entrepreneur, passing it back tothe theoretically more agile and capable management structure of the privatesector. The second phase began with the election of President Fernando HenriqueCardoso, when privatization of public services began. At this stage, thegovernment aims at improving the quality and increasing the coverage of publicservices, only retaining responsibility for their regulation andsupervision. In Arndt's view (2), this public administration model provides considerableleverage for sustainable economic growth, ending the government's investmentcapital deficit by partnerships with the private sector and relieving the statemachine of various liabilities which are no longer in line with the opening ofthe world economy - in which only competitive organizations survive, whetherprivate or state-owned.