Summary

This digital artifact has been developed as part of the requirements of the Financing for Development course offered by the World Bank. The target audience is my graduate students and it aims to present the huge needs of infrastructure investments in Brazil, exploring some of the financing needs and private opportunities for these projects.

The country

Brazil has an area of 8.5 million sq. km with a population of circa 200 million people, 85% of which leaving in urban areas. Its GNI per capita PPP is US$ 14,750 and a growth rate of 1.62% in its GDP per capita in 2013 (http://aidflows.org). But unequal income distribution is a problem in Brazil that statistics do not show (http://www.oecd.org/eco/surveys/Brazil_2013_Overview_ENG.pdf), and that makes the country to have a developed part comparable to many European countries and, at the same time, a underdeveloped part comparable to many African countries.

The gap context

Infrastructure is the main bottleneck for a consistent economic development in Brazil nowadays. In 2007 the federal government created the Growth Accelerate Program (PAC – Programa de Aceleração do Crescimento) a series of infrastructure projects all over the country. From 2007 to 2010 circa US $ 250 billion were mobilized to enable and initiate the PAC, with some relative success. In 2010 was launched the PAC 2 with a wider range of social projects and a prospective budget of circa US$ 750 billion (http://www.pac.gov.br/) . But from 2011 to 2014 the PAC and PAC 2 were weaken due tremendous management, political and economic difficulties, including Petrobras corruption scandal. Most of the PAC projects were not finished and many of the PAC 2 projects not even started (The Economist Nov 12th 2009 and Sep 28th 2013).

In a deep need of infrastructure investments, with underdeveloped roads, rail and ports creating a drag on the economy, Brazil ranked 120th out of 144 countries surveyed by the World Economic Forum in 2014 on overall infrastructure quality.

Among the infrastructure sub-sectors that claim for investments, the most urgent are transport, sewerage and energy. According to Anuário Exame de Infraestrutura 2015 although responsible for 61% of its domestic transport, Brazil still has 87% of its roads unpaved; more than 100 million people without sewerage; and the electric energy consumption per capita will jump 36% from 2,648 kWh/year in 2014 to 3,603 kWh/year in 2023. These tree sub-sectors together are responsible for US$ 198 billion of the total US$ 300 billion planned for the 1,640 infrastructure projects mapped by Anuário Exame de Infraestrutura 2015 (http://exame.abril.com.br/revista-exame/infraestrutura/2015/obras/).

Financing Needs

Infrastructure investment in Brazil has dropped from an average of 5.2 per cent of GDP in the early 1980s to an average of 2.25 per cent of GDP over the last two decades, according to a recent IMF report. It is clear that the current level of investment is below the sustainability rate, which means that the infrastructure gap is becoming bigger. According to the IMF, part of the growing infrastructure gap may be due to inadequate maintenance and intensification of use, but the largest share of the gap is due to a prolonged period of underinvestment relative to other countries. It has been estimated that inefficiencies due to inadequate infrastructure can subtract as much as 10 to 15 per cent from a country’s GDP.

According to Confederação Nacional do Transporte (National Transport Confederation) the amount of investments needed to recover the existing 13% (100,000 km) of paved roads is estimated in US$ 74 billion. Based on the actual investment rate of 2.5 billion/year, it will take 30 years only to maintain these existing paved roads. But the Brazilian transportation needs go far beyond this 13% of existing paved roads, and claim for solutions on the other 87% of unpaved roads, besides railways, river waterways, ports and airports responsible for the other 39% of transportation, not forgetting the huge needs for urban transport, not included.

The Plano Nacional de Saneamento Básico (Sewerage National Plan) launched in the end of 2013 estimates US$ 125 billion to be invested in the next 20 years to solve the sewerage gap. This means some US$ 6.25 billion/year or 4 times the the average investments of the last 10 years, that is clearly impossible only with government resources.

Hydroelectric power is responsible for 62% of the 138 MW generation capacity in Brazil. Although there are 3 big hydroelectric plants Belo Monte, Santo Antonio and Jirau) under construction in Amazon region, with a total generation capacity of 17,683 MW (respectively 11,233 + 3,150 + 3,300 MW), it will be necessary other 63,000 MW to fulfill the electric power demand projected for 2023, according to the Centro Brasileiro de Infraestrutura (Infrastructure Brazilian Center). Based on the present costs of US$ 1.200/kW, it means some US$ 75,600 billion only in power generation, but the needs will also include investments in transmission and distribution.

Investment Opportunities

Brazil´s infrastructure is 3 decades late and even at the peak of its bonanza between 2003 and 2010, infrastructure investments were far less than necessary to fill the gap and also far from major economies spends of 5 to 7 percent of their GDP, according to the World Bank. While demand has risen, the country has not grown its infrastructure, but has roughly maintained the existing one and catched up to past demand.

More than US$ 400 billion will be necessary to accomplish the present Brazilian infrastructure project pipeline of 1,640 projects mapped by Anuário Exame de Infraestrutura 2015. From the 28 major projects that were in design phase in 2014, only 5 has actually started in 2015 and this slippage is clearly due to government economic constraints.

Although the tripod investment climate, tax collection and efficient public spending may not be considered a triple A in Brazil, the country has a well established tradition of private participation in infrastructure, being a leading country in the developing world in such form of contracting. Public Private Partnerships in Brazil were regulated in 2004 and since then, many successful projects has been headed, especially in the transport and energy sectors. Regulation has also been improved since many of these projects are natural monopolies, because their resulting products or services may be nonexistent in the region where they are built. By the other hand, experience has proved that sectors with higher private participation (e.g. electricity and telecom) have achieved better performance than those with less private participation (e.g. water and sewerege).

There is much to be done in government bureaucracy, clearing regulation, enhancing transparency, enforcing compliance and increasing efficiency to engage private sector investments. But the lack of government resources to fill the infrastructure gap represents a great opportunity for local and foreign investors. To reach the adequate blended finance, the roles of MDBs, IFC, MIGA and World Bank are essential, not only providing guarantees, but also supporting a correct risk allocation and mitigation among the different stakeholders, as well as enhancing capacity in weak institutional environments as some states and municipalities in Brazil.

Conclusions

Infrastructure investments drive both growth and employment during construction and productivity improvements after done, facilitating the economy as a whole. With the current recession in Brazil, there is increasing trend on development of infrastructure as a stimulant for the economy.

Bridging the infrastructure gap however, begins with a focus not on short, but on long-term perspective. For this purpose, it would be necessary the creation of a cross-party long-term committee that could support the infrastructure project pipeline independently of political influences or electoral agendas.