Brazil Infrastructure 2013

Eugene Rostov

Recent news articles from Brazil are estimating the infrastructure needs for that country in the next 30 years of about R$ 253 billion. That estimate includes amounts of R$ 91.1 billion for railways, R$ 42 billion for highways, R$ 20.2 billion for ports, and R$ 11.4 billion for airport concessions. The High Speed Train project between Rio de Janeiro and Campinas, known by its abbreviation in Portuguese as TVA, is not included in the above estimates.

Given the extraordinary amounts involved, it is clear that domestic and international private sector money will be essential to accomplish these ambitious goals. The enormous prospects for mega public bids in turn are generating a great deal of interest by administrators of investment funds in Brazilian companies participating in infrastructure projects. In the coming months there will be, for example, public bids opened by the federal government for 10,000 kilometers of railways and 7,500 kilometers for highways. The energy in public bids for wind energy projects is expected to be more expensive this year as a result of the increase in the cost of equipment.

In addition, there will be bids for dozens of leased areas in public ports, and authorization of new private ports, as a result of the issuance of Temporary Legislative Measure (“MP”) 595. A ranking published in September 2012 in the World Economic Forum shows Brazil in the ten worst performers in terms of the quality of its port structure among the 144 countries analyzed. As many people know, the ports of Brazil are chaotic. In part this is due to the fact that the international commerce of Brazil doubled in the last ten years, and 94% of that commerce passes through the ports. MP 595 was authorized in December to reverse the performance of the country’s ports and encourages private investment in that sector. Given the critical importance of the ports to the continued economic development of Brazil, the recent legislation revokes prior legislation, which had strong restrictions on private investment. One of the practical effects of the bottlenecks in Brazil’s ports is the export of soybeans. Up to this point, those bottlenecks had simply increased the cost for the Brazilian producer. It now appears that these barriers will restrict the future growth of grain exports.

Unfortunately, the timeframe for these kinds of infrastructure projects, by definition, is long. For example, the first stage for the bidding of the high-speed train, which is the Concession for the Operation, started in December of last year with the publication of the bidding terms. In January and March of this year official meetings were held for clarifications for the bidders. The proposals by the competing companies will be judged and the winning concession will be formally registered in November and signed in February of 2014.

Based on the long time that such infrastructure projects need in order to be financially viable, and the enormous capital needs from the private section, the Brazilian government has attempted to create mechanisms to provide an adequate return and security necessary for such investments until the projects begin generating cash, and in various cases even after the projects begin generating cash.

In 2011, the Federal Government created Law n° 12.431, which has subsequently been amended. That Law provided a number of income tax benefits such as for (i) the financing of investment projects by foreigners through public distributed securities, (ii) the financing of domestic infrastructure projects with debentures issued by special purpose companies investing in priority segments of Brazil’s infrastructure such as, energy, transportation, basic water and waste, and irrigation, and (iii) the investments made by residents and non-residents in investment funds, which invest in the debentures of the special purpose companies mentioned above.

The recent annual publication by the World Bank and IFC on Doing Business 2013 compares business regulations for domestic firms in 185 economies of the world. In that report Brazil is ranked 130th for the ease of doing business. To start a business it is ranked 121st and the time necessary to start a company is 119 days. For dealing with construction permits it is listed as 131st. In getting electricity it is ranked 60th. As to paying taxes, it is in 156th place among the 185 economies. In the category of trading across borders it is 123rd. It comes in 116th place for enforcing contracts. Even as Brazil tries to overcome its immense structural challenges, it must also address its business regulations, which ultimately will control the administration of its infrastructure.