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The  Promises  and  Perils  of  Infrastructure  Projects  in  Brazil  

Mauricio  Portugal  Ribeiro  Development  in  Brazil:  S;ll  the  Country  of  the  Future?  

University  of  Toronto    01/20/2012  

Contents  

1.  Recent  history  of  infrastructure  investments    in  Brazil  and  the  main  challenges  

2.  How  to  meet  the  challenges?  3.  Difficul;es  to  involve  private  par;cipa;on  in  infrastructure  in  Brazil  4.  Agenda  

Annexes    A:  state  of  Brazil  infrastructure  (quality  and  access)  and  infrastructure  investments  B:  private  par;cipa;on  in  infrastructure  C:  main  features  of  the  legal  framework  for  the  priva;za;ons  and  PPP  program  in  Brazil        

1.  Recent  history  on  infrastructure  investments  in  Brazil  

•  Brazil  investments  in  infrastructure/GDP  have  decreased  since  the  80’s  70’s  -­‐  5.42%;  80’s  –  3.62%;  90’s  –  2.69%;  00’s  –  2.22%    

 •  In  the  90’s,  due  to  priva;za;ons,  in  some  sectors  investments  have  picked  up  (v.g.  telecom,  power  transmission)  –  Telecom  -­‐  70’s  –  0.8%;  80’s  –  0.43%;  90’s  –  0.73%;  00’s  –  0.73%    

•  However  in  many  other  sectors  private  par;cipa;on  fell  short  on  replacing  public  investment,  due  to:    

–  regulatory  uncertainty  (water,  sanita;on,  solid  waste,  and  energy  genera;on)    

–  bureaucra;c  obstacles    to  structure  new  projects  for  private  par;cipa;on  (roads)    

–  badly  structured  priva;za;ons  that  did  not  include  adequate  mechanisms  to  foster  network  expansion  (railroads)  

–  ideological  prejudice  against  private  par;cipa;on  (airports)    

1.  Recent  history  on  infrastructure  investments  in  Brazil  (cont.)  

•  PAC  I  and  II  –  the  na;onal  programs  to  accelerate  investments  in  infrastructure,  in  place  since  2005,  have  been  slow  on  the  execu;on  of  investments,  although  it  is  improving  year  by  year  

–  The  success  of  PAC  is  mainly  in  the  sectors  of  Oil  and  Gas,  transmission  and  genera;on  of  power  due  to  Petrobras  and  Eletrobras  capacity  of  invest    •  About  94%  of  foreseen  investment  for  these  companies  were  done  for  2010  

budget  period      

–  The  other  sectors  are  always  legging  behind,  although  year  by  year  it  is  improving  

–  Although  there  is  no  empirical  data  on  quality  of  PAC  investments,  there  is  anecdotal  evidence  that  the  quality/cost  rela;on  is  not  good  

–  PAC  does  not  include  a  long  term  policy  of  maintenance  of  infrastructure  

1.  Recent  history  on  infrastructure  investments  in  Brazil  (cont.)  

–  During  the  90’s,  when  the  country  tried  to  move  investments  in  infrastructure  to  the  private  sector,  public  sector  lost  its  capacity  of  doing  investments,  which  it  has  not  yet  recuperated  

–  New  fiscal  issues  have  arisen  in  the  post  crisis,  which  reduced  significantly  the  resources  available  for  public  investments  

•  Currently,  Brazil  infrastructure:  –  quality  is  lower  than  peer  countries    

•  84th  in  infrastructure,  WEF  2010)  •  104th  in  infrastructure,  WEF  2011  

–  level  of  investments  too  

–  level  of  access  to  u;li;es  and  telecom  is  •  Very  good  for  power  (99%  of  the  popula;on  have  access)  •  Good  for  telephone  (84.3%  including  cell  services)  •  Not  bad  for  water  (84.4%  has  access)  •  Very  bad  for  wastewater  collec;on  and  treatment  (52.5%  has  access)  Source:  PNAD,  2009  

•  As  investments  every  year  are  lower  than  what  is  needed,  the  country  will  keep  lagging  behind  if  it  keeps  the  current  levels  of  investment  

2.  How  to  meet  the  challenge?  

•  There  are  evidences  that  private  par;cipa;on  in  infrastructure  in  Brazil  is  a  quicker,  more  reliable,  and  beher  cost/quality  way  of  enhancing  infrastructure  quality/quan;ty  – Overall,  private  par;cipa;on  in  infrastructure  has  enhanced  quality  and  access  to  infrastructure  – Main  complaints  where  private  par;cipa;on  was  introduced  are  related  to  the  cost  of  tariffs    

•  Shijing  focus  from  public  sector  investment  to  private  sector  investment  in  infrastructure  can  be  the  best  way  to  tackle  the  current  issues  

2.  How  to  meet  the  challenge?  (cont.)  •  There  are  currently  very  favorable  condi;ons  in  Brazil  to  private  sector  investment  in  infrastructure:  

–  High  demand  for  infrastructure  

– Macroeconomic  stability  (stable  currency,  controlled  infla;on,  tendency  of  reduc;on  of  interest  rates,  and  investment  grade  status)  

–  Experience  with  the  involvement  of  and  regula;on  of  private  sector  par;cipa;on  in  infrastructure  

–  Ins;tu;onal  and  poli;cal  maturity  and  widespread  respect  in  any  place  of  the  poli;cal  spectrum  to  the  content  of  contracts  signed  by  the  Government  

–  High  quality  of  the  legal  framework  for  private  par;cipa;on  in  infrastructure  •  Fiscal  responsibility  protec;ons  •  Possibility  of  selng  backstop  facility  to  Gov  payments  in  cases  of  low  credit  

ra;ng  of  the  en;ty  

3.  Difficul;es  to  involve  private  par;cipa;on  in  infrastructure  in  Brazil  

•  Difficul;es  related  to:  

–  Ideological  prejudice,  labor  unions  opposi;on  and  poli;cal  sensi;veness  of  the  topic  priva;za;ons    

–  Incompa;bili;es  between  poli;cal  ;me  frame  and  technical  ;me  frame  to  structure  projects  

–  Public  sector  technical  capacity  to  structure  PPPs  

–  Coordina;on  between  public  agencies  (Fed  Gov,  State  and  Municipality)  and  also  among  agencies  of  the  same  level  of  Gov  

–  The  lack  of  a  permanent  and  organized  ac;vity  of  developing  projects  with  clear  and  stable  pipeline  

–  The  existence  of  hidden  tax  incen;ves  and  subsidies  for  the  states  and  municipali;es  to  do  public  investments  instead  of  private  investments  

– Main  source  of  long  term  finance  for  the  private  sector  is  s;ll  BNDES  

4.  Agenda  •  Expanding  the  capacity  of  EBP  and  of  the  partnership  IFC/BNDES/IDB  to  assist  Governments  to  structure  PPPs  

•  Keeping  structuring  projects  in  12-­‐18  months  in  order  to  create  a  new  track  record  on  the  ;me  required  to  structure  and  bid  out  projects  for  private  par;cipa;on  

•  Structuring  and  manage  a  pipeline  with  credible  ;meframe  to  implement  projects  

•  Develop  alterna;ve  means  of  long  term  financing  to  BNDES  –  Foster  the  development  of  capital  market  tools  to  finance  infrastructure  projects  

debt  •  Crowding  out  by  the  treasury  bonds  market  •  Recent  correc;on  of  tax  disincen;ves  to  the  development  of  secondary  market  of  long  term  

bonds  •  Create  tools  to  provide  transparency  of  the  secondary  market  deals  in  order  to  create  public  

price  references  for  the  bonds  

     

4.  Agenda(cont.)  •  Enhance  the  mechanisms  to  protect  the  independency  of  the  regulatory  agencies    –  The  main  regulatory  agencies  (the  Federal  Gov  ones)  do  not  have  

financial  autonomy  –  The  way  appointments  of  commissioners  were  managed  in  the  last  

years,  have  in  my  opinion,  reduced  the  capacity  of  the  agencies  to  take  decisions  and  resis;ng  to  poli;cal  pressures  

•  If  the  Gov  decide  to  pursue  this  course  of  ac;on,  it  will  make  sense  to  change  the  hidden  disincen;ves  and  face  the  poli;cal  opposi;ons  and  resistances  to  private  par;cipa;on  in  infrastructure    

•  Control  current  spending  to  save  money  for  public  investment  in  sectors  like  health,  educa;on  and  safety,  and  give  room  for  the  private  sector  to  invest  in  infrastructure