Por Rafael Vanzella, Debora Leal, Gabriel Rapoport Furtado and Gabriel Nagle

Law No. 14.286/21 (New Foreign Exchange Law), enacted on December 30, 2021, represents a milestone in Brazilian law regarding foreign currency transactions, including project financing on infrastructure sectors in Brazil. The new regulation is part of the “BC agenda”, promoted by the Central Bank of Brazil (BCB), which aims to rearrange Brazilian foreign exchange legislation in order to improve a formerly diffuse and anachronic legal framework and consolidate it in light of modern economic and commercial practices.

Therefore, such legal milestone plays the crucial role of consolidating a refined regulatory environment, based on contemporary international standards. It will come into force on December 30, 2022, after one year of its official enactment. In parallel, BCB and the National Monetary Council (CMN) will be responsible for the subsequent regulation of several topics aroused by the New Foreign Exchange Law.

Among the innovations carried out by the new law, it should be mentioned the facilitation of the circulation of the Brazilian Real abroad. Accordingly, Section 6 of the Law provides that banks authorized to operate in foreign exchange markets may "comply with payment orders in Brazilian Reais received from abroad or sent abroad", pursuant to future BCB regulations. Thus, the possibility of investing funds raised in Brazil in foreign operations is enabled, through the use of current accounts, denominated in Brazilian Reais, kept in banks by institutions domiciled or based abroad, subject to the regulation and financial supervision of the respective country of origin. As a possible effect, there is an increase in the circulation of Brazilian Reais in international markets, while mitigating the existing limitations for the application, abroad, of funds raised in Brazil.

From the perspective of infrastructure projects, there are also relevant changes, systematized under the guidelines of Section 13, which addresses the payment in foreign currency of obligations enforceable in the Brazilian territory. Initially, it is important to note that Law No. 14.286/21 entails, among other effects, the repeal of Decree-Law No. 857/69, which, although derived from a different macroeconomic reality, is still in force during the vacatio legis of the new regulation. The elements introduced by Section 13 of the New Foreign Exchange Law expand certain provisions formerly contained in said decree-law, providing for a broader range of possibilities and consolidating a new business environment, whose practical contours have been established through the interaction of market agents and financial institutions.

Hence, item VII of Section 13 introduces the possibility of payment in foreign currency of obligations enforceable in Brazil, in connection to "contracts concluded by exporters in which the counterpart is a concessionaire, permit holder, authorized entity or lessee in the infrastructure sectors". Accordingly, the amendment allows legal business between exporters and infrastructure project holders to be indexed directly in foreign currency, within the framework of contracts concluded in areas such as energy, logistics and transport in general, basic sanitation and facilities, government agencies, among others.

Current analyses of this subject have not given account of the extent of this novel legal instrument. There is a greater enthusiasm in the energy sector, given the possibility, now expressly permitted by law, that contracts for the purchase and sale of energy (Power Purchase Agreements – PPAs) are indexed in foreign currencies such as the US dollar and the euro. In the case of electricity generators, financed in foreign currency, as an imported equipment, their debt service is mostly tied to the dollar. Thus, the celebration of dollarized PPAs will allow an immediate upside, so that revenues can be backed by an equivalent indexer.

However, the wording of this new law provides for an even more comprehensive array of opportunities because several areas of infrastructure, besides the energy sector, could also benefit from the new perspectives. Transport contracts and other businesses related to cargo handling, for example, may also be concluded in foreign currency. Considering general market practices, which make large use of take or pay provisions in contractual arrangements within such sectors, the possibility of revenues denominated in foreign currency will facilitate the creation of guarantees for financing taken through the same indexer. In basic sanitation, likewise, it is expected that associated projects, aimed at meeting the needs of large consumers, usually the exporters themselves, will originate contracts denominated in foreign currency. This will allow water and sewage system operators to diversify their debt portfolio to include indexed financing, or even more complex swap operations, which will mitigate foreign exchange risks in the import of effluent treatment equipment and technologies.

The importance of the measure introduced by the New Foreign Exchange Law is, consequently, remarkable, since contracts under the new rules are directly related to investments in infrastructure and accurately capture the link between the infrastructure sector and the international trade, either by the provision of transportation services, the import of pivotal equipment, or by the operation of essential public services such as water and energy supply. In the impossibility of concluding contracts with the features mentioned in Section 13, holders of infrastructure projects not only have their access to the international credit market hampered, but also expose themselves to a greater amount of risks related to exchange rate variation, when indispensable inputs need to be imported. Under the New Foreign Exchange Law, those holders of infrastructure projects will have access to new sources of financing at a global level and will also be able to coordinate complex operations of revenues and expenses under the same exchange rate indexer, particularly when the transaction involves a counterpart qualified as an exporter.

The effect of mitigating foreign exchange risk on infrastructure projects was expressly contemplated by item VIII of the same Section 13 of the new law, by additionally enabling payments in foreign currency "in the situations provided for in the regulations issued by the National Monetary Council, when the stipulation in foreign currency can mitigate foreign exchange risk or increase the efficiency of the business".

In these respects, the New Foreign Exchange Law makes the regulatory approach to foreign exchange operations more flexible, by delegating the regulation of opportunities for exchange rate indexation of legal transactions governed by Brazilian law to BCB and CMN, which will allow greater agility in the provision of relevant standards to keep up with market dynamics. At the same time, the new law already contains, with regard to some opportunities in the infrastructure sector, objective parameters which, in principle, will not require further regulation from monetary authorities. In conclusion, real transformations of contractual modeling are expected, not only in consolidated sectors, such as energy, but also in more incipient ones, such as railways, ports and basic sanitation, to keep just a few examples.