New plan for Brazil

A new plan for Brazil 

At the end of 2010, Brazil’s economy was shining bright like a December day in Copacabana. Gross Domestic Product (GPD) grew 7.5 percent that year, the country’s best performance in more than two decades. The resource sector was buzzing and Brazilians were still celebrating Rio de Janeiro’s winning bid to host the 2016 Olympic Summer Games.

But as the global recovery slowed and commodity prices leveled off, so did Brazil’s growth trajectory.

Yet the country’s fundamentals are still strong; Brazil remains rich in resources and boasts a growing middle class, relatively low unemployment and controlled inflation. However, the slowdown has compelled President Dilma Rousseff and her government to look for new ways to keep Brazil moving forward.

Near the top of the list: improving the country’s infrastructure.

Get brazil moving again

Brazil’s infrastructure has long been an area of concern. “Brazil suffers from high logistics costs due to poor infrastructure coverage,” noted Mr. Bernardo Figueiredo, the President of Empresa de Planejamento e Logística (EPL), a public company created by the government to support infrastructure development in the country. “We need to expand our infrastructure into the interior regions of the country and help reduce logistics costs as a way to become more competitive on the world stage.”

Transportation has been a particular challenge. The top 20 airports in the country operated at an estimated deficit capacity of 73 million passengers in 2011. And just outside of São Paulo earlier this year, a 64-kilometer traffic jam of trucks (waiting to unload a record soybean crop) choked access to the largest port in Latin America.

Now, as the 2014 FIFA World Cup and 2016 Olympics beckon, the issue has been put under a microscope not just at home but abroad. “Over the past 3 years, we’ve been very focused on helping those cities involved in these events prepare not only the arenas but also all of the infrastructure that will be needed to properly and efficiently deliver such high profile global events,” noted Mr. Benedicto B. da Silva Junior, President of Odebrecht Infrastructure, one of Brazil’s – and the world’s– leading infrastructure, construction and operating firms. The company is a part of the Odebrecht Organization, also present in the petrochemical, ethanol, oil and gas, and real estate sectors.

At the same time, President Rousseff is planning huge investments in power generation and water, and the government’s recently announced Logistics Investment Program (LIP) seems set to transform the country’s economic infrastructure.

“The LIP will radically change the country’s capacity to deliver infrastructure which has traditionally been hampered by low levels of investment, a lack of skilled professionals and tight material availability,” added Mr. Figueiredo. “We believe that the LIP will not only help catalyze Brazil to improve our delivery capability, but will also attract skilled professionals and investors from around the world.”

A new plan based on tested principles

There is good reason for optimism about Rousseff’s plan. Whereas her Workers’ Party was once opposed to privatization, it has now thrown its arms around the concept of both non-subsidized and subsidized Concessions and Public Private Partnerships (PPPs) respectively, a move that should bring new life to Brazil’s infrastructure sector.

While this may seem like a fairly new development, Brazil actually has a rather long history of successful concessions that started when the Federal Government first passed national legislation governing concessions in mid-1996 (“the Concession Law”). Since then, both the federal and state governments have signed a raft of concession contracts, particularly in the roads, power and telecommunications sectors. The model was then reinforced in 2004 with the passing of the “PPP Law”, which allowed the government to sign several subsidized concession contracts in the water, social infrastructure and transportation sectors.

“We’ve been successfully using PPP models in cities for a number of years now and this should help the federal government quickly come up to speed on how to best structure, tender and partner with the private sector for the delivery of infrastructure,” added Mr. Silva Junior.

For example, the federal government recently launched an initiative to extend water and sewage treatment to more than 90 percent of the country’s urban population, which has inspired a US$200 billion investment program in water and sewage treatment infrastructure that is expected to be rolled out over the next 20 years. This has had spill-over effects in the states. For instance, KPMG in Brazil recently worked with the Pernambuco state government to develop and tender a US$2 billion sewage treatment PPP project in the metropolitan region of Recife, which was successfully awarded to a private consortium in February this year.

The passage of the PPP Law in 2004 went further in encouraging private participation and inspired state governments such as Minas Gerais, São Paulo, Pernambuco and Bahia to start implementing PPP pilot projects. In just the first 6 years since the law was issued, Brazil has seen tremendous progress in a wide variety of sectors such as highways, metros, prisons, sewage treatment facilities, hospitals and even football arenas ahead of the 2014 World Cup.

“By clarifying and codifying measures to encourage private participation in the Brazilian marketplace, the government has really signaled that there is a place for private enterprise, both as a partner to government and as individual companies,” added Odebrecht’s Mr. Silva Junior. “We recognized the growing influence of PPPs early on and have focused on improving our understanding and use of PPP mechanisms, contracts and processes. As a result, we’ve been extremely successful in working with the states and cities on PPP developments.”

Opportunities abound

Brazil’s infrastructure plans open up a world of potential for investors across a wide variety of sectors. For example, Brazil is investing US$66billion to make over its rail and road networks. The LIP aims to double the capacity of main roads and railways over the next 5years– welcome news to industry, which currently transports about two-thirds of the country’s goods via the decaying highway system.

The government is paving the way for private contractors to build nine toll roads totaling about 7,500 kilometers, adding to the existing toll ways managed by concessionaires and backed by a regulatory framework set up in the mid-1990s. Railway auctions are also on the agenda. A bullet train to link Rio de Janeiro and São Paulo is expected to be tendered this year with operations expected to be open by 2020.

However, the primary focus of the program is on developing freight lines to not only take some pressure off the roadways, but also to help decrease transportation costs (particularly for commodities such as soy beans and mining cargo, which are considered to be among Brazil’s strongest exports).

“Foreign investors and participants are keen to understand the exact rules and model that are being used in the railway sector,” added Mr. Figueiredo. “The model being suggested in the LIP borrows elements from several different concession models and includes a very innovative risk mitigation component, and so it has been the subject of much interest from the international community.”

The ports sector is also buzzing. With 7,500 kilometers of coastline and a heavy reliance on exports, Brazil’s National Bank for Development (BNDES) expects nearly US$30 billion to be poured into port infrastructure by 2017. A bill currently making its way through the legislative process will allow private ports to handle any type of cargo, open public port terminal contracts to private tenders, and allow private operators to handle more third-party cargo. Up for debate is a proposal to allow 50-year contracts in the form of renewable 25-year concession periods.

The country’s clogged airports will also see increased activity. Following on the heels of last February’s Concession contracts to upgrade three major airports (São Paulo, Brasília and Viracopos International Airports) for more than US$14 billion, the government announced in December that it would invest about US$3.7 billion in 270 regional airports nationwide, and launch new Concession tenders to upgrade the international airports of Rio de Janeiro and Belo Horizonte during the 3rd quarter of 2013.

But the LIP is only the tip of the iceberg. “The current program only represents about a third of the amount the country needs to properly compete,” admitted Mr. Figueiredo. “That’s why the EPL was created: to bring this long-term investment opportunity to the market and demonstrate that investments in Brazil are not only high-return but also very secure.”

Happy landing

In an unprecedented move to drum up support from international infrastructure investors, government ministers and other technocrats have crisscrossed the world’s financial capitals to sell investors on Brazil’s infrastructure strategy. All told, the programs will amount to well over US$500 billion.

“I’ve personally participated in these road shows and have found that investors and foreign infrastructure participants are extremely interested in the program and are seeking partnerships with Brazilian companies and the government as a way to start getting involved in the market,” added Mr. Figueiredo.

Brazilian companies are reporting similar trends; “Over the past 2 years, we have been approached by a wide variety of international players – investors, contractors, suppliers and so on – that want to team up with Odebrecht to ease their entry into the different sectors,” added Mr. Silva Junior.

“Most foreign investors and players that I talk to have said that their chief concern is the need to identify local companies and partners that understand the markets that they want to operate within,” added Mr. Figueiredo. “That’s why we are focused on creating venues to help bring these parties together.” For instance, in August, the EPL teamed up with the Federation of Industries of the State of São Paulo to host international investors and participants interested in building relationships with potential local partners.

The much anticipated arrival of the World Cup and the Summer Olympics has also created significant long-term capacity within Brazil’s infrastructure sector. “Meeting the high standards and aggressive timelines set by the games committees has forced Brazil’s infrastructure providers to really step up to bring a new level of efficiency and quality to their projects,” added Mr. Silva Junior. “These capability gains are not just going to disappear once the games are over; the lessons we are learning will help us improve infrastructure delivery right across the country for a long time to come.”

With fresh thinking on PPPs and a strong dose of investment, we believe Brazil’s current track should help get the country moving more efficiently. And that will go a long way to helping the world’s seventh largest economy live up to its full potential.

By Mauricio Endo, KPMG in Brazil

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INSIGHT: Resilience

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