July 20, 2016 / 8:47 PM / 2 years ago

Cut in subsidies to make Brazil power costlier but more efficient

SAO PAULO, July 20 (Reuters) - Large private and foreign groups will displace Brazil’s state-led power companies in upcoming energy auctions, causing consumer electricity bills to rise as the BNDES development bank cuts long-standing loan subsidies for the domestic industry.

Maria Silvia Bastos Marques, chief executive of state-owned BNDES, said recently the bank will curtail its role in the September transmission line and October power plant auctions.

Analysts say greater participation of foreign investors and lenders will make Brazil’s already costly electricity rates even more dear for consumers, but add that fewer state-led investments will increase efficiency in the sector

The cuts in subsidies offered by the Rio de Janeiro-based bank have been widely seen as inevitable, given Brazil’s budget crisis and recession.

China’s State Grid, Europe’s ENGIE and the United States’ AES Corp are expected to be some of the large foreign companies to be active in the coming auctions, as subsidiaries for the government’s cash-strapped energy holding company, Eletrobras, rein in ambitions.

BNDES, Brazil’s largest provider of bank loans with terms of more than a year, has long been used by the federal government to direct economic growth and industrial development. BNDES subsidies have also helped local companies compete against foreign rivals, which frequently have access to cheaper credit.

Disbursements from BNDES for the electricity generation and distribution industries reached an all-time high of 22.3 billion reais ($6.85 billion) in 2015, rising from 8.8 billion reais in 2002.

Specialists told Reuters the type of investors in the energy industry, which has benefited from generous, below-market interest rates on loans, will change drastically in the short term.

“Initially this will be a shock to the market, which had counted on BNDES. It will at first take the wind out of the drive to participate in the auctions,” said Edvaldo Santana, former director of the energy sector regulator Aneel.

Concern about BNDES’ lending cuts has been rising since late 2015.

Although bank’s rules allow BNDES to finance up to 70 percent of energy sector investments, few companies or investment groups have received more than half their financing from BNDES, forcing them to issue convertible debt to cover the rest of their needs.

Erik Reto, director of Sao Paulo-based Excelencia Energetica consultants, said the change will require higher rates of return on investment in the auctions - meaning higher energy costs for consumers - in order to attract investors.

“As a consequence of ending the former policy (of subsidizing investment heavily), prices will have to rise. If not, there will be no investment,” Reto said.

With the retreat of BNDES, however, investments in the energy sector will become more efficient, said Gabriel Fiuza, a business professor in Rio de Janeiro at IBMEC and the Getulio Vargas Foundation.

“There will be more agents: Private banks, investors and insurers. You create conditions not only to stimulate capital markets but to improve the quality of the investors, the projects and the investments,” he said.

Initially, competition will decline as large private groups, mostly foreign investors with greater access to credit, dominate the auctions and are more selective about the projects in which they invest.

“Only big private investors will be able to play. The state companies lack financing for this. When things calm down, the state companies will come back slowly,” said Santana.

($1 = 3.2554 Brazilian reais)

Writing by Reese Ewing; Editing by Jeb Blount and Steve Orlofsky

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