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Infrastructure Investment In Brazil « Back
Selina Harrison, January 2010
 
As the hosting country of the 2014 World Cup and the 2016 Olympic games, Brazil is faced with the significant challenge of improving its infrastructure to support the influx of visitors that these events will attract. This will require extensive investment into Brazil’s urban areas, sporting facilities and tourism sector. As a result, many of the world’s investment funds and financial institutions are preparing themselves for a boom in financing opportunities.



Bridging the gap

Improving transport links and boosting the country’s energy sector have been priorities of the Brazilian government. Vast amounts of funding have been pumped into the development of its infrastructure over the last 18 months or so. “The infrastructure sector in Brazil has been boosted by the action of the Brazilian Federal Government to maintain the flow of capital for projects through large public banks,” confirms Alan do Amaral Fernandes, a senior managing director at Espirito Santo Investment. With government support, development banks, such as the Brazilian National Development Bank (BNDES) and Banco do Nordeste do Brasil (BNB), have been able to encourage the development of important energy projects such as the San Antonio and Jirau hydroelectric dams.


Additionally, Brazil’s Accelerated Growth Program (Programa de Aceleração de Crescimento, PAC) estimates there will be almost $800bn allocated to Brazil’s infrastructure sector between 2008 and 2013. The energy sector will demand around $400bn of the total amount. As such, it is clear that this sector will be one of the main drivers of infrastructure investment – not only is there an abundance of funding, but the sector’s stable regulatory framework makes it attractive to investors.

Another important driver of infrastructure investment in Brazil, according to Sergio Galvis, a partner at Sullivan & Cromwell LLP, where he heads the firm’s Latin America practice, has been the rise of a stable middle class. “This has led to an increase in domestic demand for basic infrastructure needs such as energy production, distribution and transportation,” he explains. As a consequence, Brazil’s road sector has performed well, resulting in a number of states being awarded loans by the Inter American Development Bank (IADB) for upgrading roads. Additionally, in the second quarter of the year, motorway operator Primav EcoRodovias signed a 30-year concession contract for the structure of the Ayrton Senna Carvalho Pinto motorway, at a cost of around 6.9bn reais ($4bn). “At the moment there is a heavy focus on transportation-related projects, including roads, airports and ports. Ports, in particular, will continue to be a focal point of development as Brazil will need to secure access to shipping in order to export natural resource products and other goods,” says Mr Galvis.

Indeed, there are numerous projects in the pipeline – for example, up to 31.3bn reais ($18bn) has been allocated for the construction of a high-speed train linking Sao Paulo and Rio de Janeiro. The line should be completed just prior to the World Cup, simplifying transport options for visitors traveling between the cities. In another example, Brazilian energy giant Petrobras reportedly intends to invest around 305bn reais ($175bn) in oil exploration and production projects in its home country between 2009 and 2013. 



However, there have been some setbacks. The long-awaited auction of Brazil’s massive hydroelectric power station, Belo Monte, has been postponed until early 2010, after costs for the project more than doubled to 19bn reais ($11bn). As with almost every other country and every major sector, the Brazilian construction industry has been subject to declining investment in infrastructure during the credit crisis, making access to finance very difficult for some investors. “Certain banks have ceased to provide finance to certain sponsors based on the MAC clause,” notes Rafael D’Avila Dutra, a partner at Uria Menendez. “However, the Brazilian infrastructure sector has proven to be a safe and profitable investment, and finance from both national and international banks has started to be available again,” he adds. Even so, in its Q4 2009 Brazil Infrastructure Report, Business Monitor International forecasted a 5.15 percent contraction in Brazil’s construction industry for 2009, or a reduction to 132.3bn reais ($64.bn).



Opportunities and risks

In February this year, the Brazilian government announced that, under the PAC, state and private spending on Brazilian infrastructure would increase 28 percent from 504bn reais ($289bn) to 646bn reais ($370.7bn), in order to offset the economic damage caused by the financial crisis. At the time, Dilma Rousseff, head of the Brazilian government, said the increase would sustain infrastructure investment levels and therefore accelerate the pace in which Brazil emerges from the downturn.” At this point in Brazil’s economic development, infrastructure projects remain a necessity regardless of the recent global downturn. Even before the economic crisis, Brazil’s leaders had recognised that infrastructure projects were necessary to accommodate and stimulate growing foreign investment,” says Mr Galvis. 

Energy has long been Brazil’s Achilles’ heel – recent power failures left about half of Brazil’s population without electricity, reviving fears about the country’s ability to provide an energy infrastructure which can support its surging economy. Nonetheless, there should be plenty of safe and long-term investment opportunities to dispel those fears. According to figures from UK Trade and Investment, the World Cup alone represents the potential for £10-30bn (28bn reais to 86bn reais) of infrastructure investment opportunities for UK companies in Brazil. Further, as the majority of these construction projects are funded by development banks, foreign investors continue to make returns. However, it is important to remember that Brazil is an emerging market, and as such, there are still risks for foreign investors in the region.
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