Brazil Infrastructure Report Q2 2008

Brazil is one of the world's fastest-growing economies. Globally, it is the ninth-largest economy. With an abundance of agricultural and mineral resources, and a government that is actively encouraging of foreign investment, Brazil is one of Latin America's increasingly attractive places to operate business activities.

The current environment is characterised by the government's growth-acceleration programme (PAC), launched in 2007. PAC is a package of investments in infrastructure designed to boost economic expansion and job creation. It promises BRL504bn (US$249bn) of investments from 2007 to 2010, with the ultimate aim of increasing the rate of economic growth from roughly 3% per annum since 2000 to the government's target of 5%.

The PAC programme encompasses building initiatives such as airports and ports nationwide, the repair of highways, development of energy projects in the north, and providing housing, water and sewage systems to benefit the poorer Brazilian communities. The programme also consists of measures to improve the investment environment. A quicker turnaround of construction projects is one of the expected outcomes, plus the encouragement of further infrastructure development through oil, gas, transportation and sanitation projects of BRL500bn (US$235bn) up to 2010.

Public-private partnerships (PPP) entered the Brazilian infrastructure landscape in 2004, but complex problems have prevented their full implementation. In February 2007 the World Bank published its report How to Revitalise Infrastructure Investments in Brazil: Public Policies For Better Private Participation, advising of key changes required to encourage private investment into government-policy infrastructure projects. The removal of legal and procedural bottlenecks was called for, plus the redesign of infrastructure concessions to avoid "excessive re-negotiations". The report's primary theme was that Brazil should work towards reducing the cost of capital for private investors to infrastructure. It stated that despite a general policy trend towards public funding of infrastructure throughout Latin America, private investment in Brazil's sector was vital given the magnitude of the infrastructure needs.

An important overall limitation of the PPP approach is that it has only generated private investment at a regional level. The laws regarding foreign companies are strict and the provision of construction services can only be offered where a company has a Brazilian partner or is established in Brazil. Meanwhile, locals and foreign investors alike remain frustrated at the lack of transport infrastructure and slow progress in the development of roadways and port terminals.

The International Development Bank (IDB) and the World Bank remain important sources of Brazil's infrastructure funding. The construction industry has been buoyed by solid government investment while receiving greater attention from private investment sources. Many public companies have sought to list on the stock exchange.

The authority for Brazilian airports is the public company Infraero. A total of 67 airports are managed by Infraero, representing well over 90% of the regular air carriage activity in Brazil. In addition it manages some 81 air navigation stations and 32 cargo logistics terminals, according to the public information available.

Brazil's three largest infrastructure companies remain privately owned and are part of huge conglomerates. All three have made assertive, if not aggressive, international expansion a goal, as acquisitions of Latin American and North American companies have shown. Votorantim recently increased its status as a global player, extending to China through the acquisition of a US-based zinc refining company which has a new plant close to Shanghai.

BMI forecasts an average construction-industry growth rate of 3.0% during 2008-2012, despite some risks. Stronger government spending plus foreign investment in construction should propel growth rates of the industry. The government's early research into the linking of various cities by rail, road, waterways and airways should have a positive impact and draw further growth to the infrastructure sector.