The $64 Billion Dollar Question: Can the Rousseff Administration Reboot Infrastructure Investment? / by Mark Langevin

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Yesterday President Dilma Rousseff announced another iteration of an infrastructure based stimulus package, known as the second phase of the Logistics Infrastructure Investment Program, or “Programa de Investimento em Logística.

This most recent iteration proposes $64 billion USD in private investment to expand transportation and logistics infrastructure, and by consequence, stimulate economic growth. The problem of Brazilian infrastructure investment is well documented, including the BrazilWorks Briefing Paper, Infrastructure Investment In Northeastern Brazil. Brazil’s infrastructure deficit is alarming and a major factor lying behind the notorious “custo Brasil.” According to the International Monetary Fund (IMF),

Brazilian “Infrastructure is not adequate to support current income levels, foster regional integration, and put Brazil on a more competitive footing against rivals in main export products which include some of the advanced economies (International Monetary Fund 2015:20).”

The “infrastructure gap” is now recognized as one of the most important factors associated with Brazil’s falling economic competitiveness and growth potential. The Economist singled out Brazil to deride its low levels of public and private infrastructure investment.

“Just 1.5% of Brazil’s GDP goes on infrastructure investment from all sources, both public and private. The long-run global average is 3.8%. The McKinsey Global Institute estimates the total value of Brazil’s infrastructure at 16% of GDP. Other big economies average 71%. To catch up, Brazil would have to triple its annual infrastructure spending for the next 20 years.”

This most recent effort to turn the tide and increase private sector investment promises better terms than prior attempts. As Reuters reports,

The plan aims to correct the failings of previous concession sales which drew scant interest because of excessive state intervention… A previous effort by Rousseff to lure 210 billion reais [$67.8 billon USD] in private investment in 2012 managed to attract only about 20 percent of the targeted funds, with no bidders at all for the 14 railways and 160 port terminals on offer.”

For example, three years ago the federal government planned to build 10,000 kilometers of railways to lower the costs of shipping its abundant soy harvest in the Center-West region to ports for export with the goal of incorporating approximately $30.83 billion USD from private investors. Yet these plans are now held hostage by the federal government’s failure to arrive at a decision on how best to structure a new concession model for private investment in railways. This example is emblematic of Brazil’s inability to finance all needed infrastructure through public investments, the absence of effective capital markets for infrastructure, and the demonstrable political and policy challenges to moving ahead with concessionary frameworks for increasing private sector investment in transportation infrastructure.

The Brazilian government’s newest plan would deliver up 4,371 kilometers of roadways, expand rail and seaport capacity to accommodate the shipping of agricultural commodities, such as soy, from the Center-West region. The government also plans to auction off increasing numbers of airport concessions, including a next round with Porto Alegre, Fortaleza, Salvador and Florianopolis. According to Reuters, the BNDES will continue to anchor the public sector investment scheme by extending favorable term loans to the private sector, up to 70 percent financing for most projects with the private sector responsible for buying government infrastructure bonds from the Banco do Brasil.

More importantly, the government promises to develop a new concessions model capable of attracting more private sector investment by confronting the risk-return ratio through more realistic terms. The government points to the new concession contract to maintain the Rio-Niterói bridge. In 1995 the bridge was the first concession of federal highways in Brazilian history. ECOPONTE made a successful tender offer with $420 million USD to be invested in upgrades and the lowering of the user fees. This new concession may pay off for the state of Rio de Janeiro, but it is not clear whether the federal government can effectively develop and administer a new concession model(s) across transport and logistics activities that can invite sufficient private sector investment to spark economic growth in the short term and significantly expand productive infrastructure in the long term.

It may be that the most important feature of this second phase of the infrastructure investment program is the possibility of assisting those large Brazilian construction firms implicated in the “Lavo Jato” or “Petrolão” scandal. According to Reuters.

“Brazil's top engineering firms implicated in the kickback scandal at Petroleo Brasileiro SA (PETR4.SA) will be free to bid for the infrastructure projects, officials said. That could provide a vital lifeline to some of them facing bankruptcy after their contracts with Petrobras were put on hold.”

The Brazilian government may be overly optimistic with respect to its efforts to attract $64 billion USD in private sector transportation infrastructure investments in the coming years, but including implicated firms might be most important to working through this corruption scandal. Can the Brazilian government effectively solicit concession bids, evaluate them, and award projects to major construction firms tied up in scandal and suffocating from the economic paralysis associated with the “pay to play” Petrobras scandal? More importantly, can the government engineer these concessions to minimize corruption and kick backs while also introducing corporate governance reforms, including whistleblower protections for both public and private sector employees?

It is critical that Brazil increase private sector investment in transportation infrastructure, but the federal government should take the lead to reform laws and rules regulating the conduct of government officials and private firms with respect to procurement and contracting, squeezing out opportunities to rig the concession game and rendering these government-business relations as transparent as possible. The essential trade off inherent in this scenario is to increase the return from risks for private sector investors while raising the anti-corruption bar so that all investments efficiently expand the country’s productive infrastructure.