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SPECIAL TOPIC

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Hypermodern: TheMonorail, which is cur-rently being built byBombardier in SãoPaulo, will carry morethan 48,000 passen-gers per hour from thetwo settlements VilaPrudente and CidadeTiradentes to the city.

AlexAnder BuSCH

Brazil’s infrastructure is threatening to slow its growth. In the run-up to the sporting mega-events, billions are being invested in the construction of power stations, roads, airportsand railways. As an insurer, Allianz Global Corporate & Specialty (AGCS) is contributingto a new risk culture in mammoth building projects.

Brazil at a turning point

Power drives business, and business drives growth. Thephenomenal rise of the Brazilian economy in recent years is threatened by a risk which, in the worst case,could significantly impact the country’s future growthplans. This scenario could include blackouts lasting sev-eral hours across whole regions, fuel station shut-downs in the north and south of the country and a lackof cooking gas in São Paolo.

In early 2013, such a worst-case scenario threatenedparts of the vast country. As a result of a drought that had lasted for months, some regions of Brazil were at risk ofenergy blackouts due to a potential shortage of electric-ity, compounded by dwindling supplies of fuel and gas.This time, the scenario was not realized, but the riskhighlighted the challenges that Brazil’s economicgrowth poses to the country’s infrastructure.

The reason for such shortages is years of underinvest-ment in energy production. In times of drought, thisleads to supply shortfalls in energy production, as mostof the storage dams for the hydroelectric power plantsare nearly empty. These produce some 80 percent of Bra-zil’s electricity. The 37 oil- and gas-driven power plantsthat are on standby for emergencies and times of peakdemand have already been operating at full capacity formonths now.

Lack of distribution networkThe operators lament that they simply cannot getenough fuel, the market has been swept clean. Of the to-tal 73 gigawatt hours (GWh) of electricity, the thermalpower plants produced one-sixth with their 12 GWh atthe beginning of 2013. This, however, requires privateand public sector operators to import fuel at high prices,exacerbating the already strained conditions in the fuelsupply market. For, even if they do import, they are im-mediately faced with the next problem: Brazil doesn’tyet have the infrastructure it needs to import and dis-tribute around the country what will soon be one-fifth of its total fuel. The ports, fuel depots and thedistribution network are not geared to handle suchquantities.

The strained situation in the power industry and theripple effect it is having on other infrastructural weak

“Supporting engineeri ng projects with technical expertise and insurance cover is a key part of our busi ness.” Angelo Colombo,

CEO of AGCS Brazil

spots show that Brazil’s infrastructure is inadequate.This is the result of past failure to invest in it: since the oilcrises in the 1970s and the turn of the century, outlays ininfrastructure investment have largely stagnated. At itslowest in 2003, investment was just 0.1 percent of grossdomestic product.

At the same time, Brazil’s growth has picked up: to aboutfour percent on average per annum between 2003 and2010. And with every uptick in growth, the lack of goodquality roads, overstrained ports and energy shortagesturn into brakes on growth in the world’s sixth-largesteconomy. Last year, Brazil’s economy barely grew, fol-low-ing growth of just three percent in 2011.

Knock-on effects on agricultureThe Brazilian agricultural industry – one of the country'smost competitive sectors – was painfully aware of the ef-fect of Brazil's infrastructure on the economy. The farm-ers achieved record yields with their corn and soy cropsin the last harvest season. While the drought in the UScaused prices to soar, mountains of corn and soy piledup in the fields in western Brazil because they could notbe transported elsewhere. The farmers were unable toship their corn because of the overburdened highwaysand ports.

Outside each of the three largest ports in southern Bra-zil there are now several dozen container ships waitingto unload, with waiting times of up to two weeks. Thirtykilometer queues of trucks at the ports are an everydayoccurrence. The mayor of Rio de Janeiro has now woncourt backing to ensure that the tankers and containerships waiting outside Copacabana and Ipanema nolonger spoil the views from its beautiful beaches. A sec-ond shipping route to the port under Sugarloaf Moun-tain is now hastily being created to reduce the unload-ing times.

Brazil’s governments recognized that infrastructurewould become the bottleneck to the country’s econom-ic growth. In 2007, then president, Luiz Inácio Lula daSilva, presented a program to speed up growth (Progra-ma de Aceleração do Crescimento, PAC for short). Thetotal amount of PAC funding, which was earmarked largely for infrastructure projects, was €380 billion for

Brazil is expanding its transport systems. President dilma rousseff announced tenders to build over 50,000 kilometers of roads as well as 12,000 kilometers of trailroad tracks. Already operating in São Paulo: the rodanel Mário Corvas (photo above) and the Metro, which is being continuously extended (photo below) .

To tackle bottlenecks in energy supply, new power plants and refineries are beingbuilt in the vast country. The Abreu e lima refinery in Pernambuco state is currentlyunder construction with operations planned to start at the end of 2014 (photo abo-ve). One of the largest hydro power plants in the world, the almost 30 years old Itai-pú dam, was expanded in 2007 with two new turbines (photo below).

For the Soccer World Cup 2014 and the Olympic Games 2016 many stadiums arebuilt or renovated. The photo above shows the constuction site of the spectacularArena da Amazônia in Manaus. To ensure smooth transport for millions of visitors,Brazil is not only investing in roads and railways, but also in airports. every city withmore than 100,000 inhabitants should get its own regional airport to disburdenthe large hubs such as the international airport in rio de Janeiro (photo below).

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ANGELO COLOMBO CeO AGCS Brazil angelo.colombo@allianz.com

ANDREAS HOELSCHERHead of engineering, AGCS Brazilandreas.hoelscher@allianz.com

JONAS RASTELLIrisk Consulting engineering, AGCS Braziljonas.rastelli@allianz.com

WWW.AGCS.ALLIANZ.COM/GLOBAL-OFFICES

the period to 2010. In 2010, the PAC was extended to2014 and given a further sizable injection of funds.

The implementation of the PAC had strong political sup-port in order to remove initial bureaucratic and legal ob-structions. Although challenges remain, there have beensignificant improvements in planning and execution, butalso in environmental licensing and in the private finan-cing of long-term projects.

Active response Overall, companies are expected to play a greater role inthe future by contributing more to Brazil's infrastructureexpansion. Therefore, President Dilma Rousseff has launched a concession program for the private sector. Af-ter all, the 2014 World Cup soccer tournament and the

2016 Olympic Games are just around the cor-ner. Brazil definitely doesn’t want to see visi-tors in overcrowded airports or in permanenttraffic jams on the roads, or see games beinginterrupted by blackouts.

In a first move Rousseff announced tenders tobuild over 50,000 kilometers of roads as well as12,000 kilometers of railroad track at the endof last year. In addition, the details of conces-sions for five airports and five ports are ex-pected to be released this year. The moderni-zation of more than 100 small provincial air-ports may also make its way onto the agenda.Oil and gas fields are to be put up for tenderagain after a five-year break. Potentially, theplan for constructing the high-speed rail link

between Rio de Janeiro and São Paulo will also be presen-ted in 2013. Here, the Brazilian government is planningto divide the construction into sections and auctionthem off to ten different consortiums in order to speedup the construction of the line.

Competitive marketThe planned infrastructure projects provide a promisingoutlook for insurers, including Allianz Global Corporate& Specialty (AGCS), which received a license in Decem-ber 2012 to set up a local reinsurer named Allianz GlobalCorporate & Specialty Resseguros Brasil S.A. (AGCS Brazil,for more information see infobox). “Providing insurancefor engineering and infrastructure projects accounts fora large part of our business. Our clients appreciate ourtechnical expertise and financial strength,” says AngeloColombo, who heads the new reinsurer AGCS Brazil.

With its construction all-risks insurance, AGCS Brazil isinvolved in the construction of dockyards, power plants,roads and railways. Policy holders are leading Brazilianconstruction and energy companies, as well as foreignsuppliers of turbines or transport systems. Once the in-dustrial plants start operations, AGCS Brazil offers pro-perty cover for plant and equipment as well as machin-

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On-site inspectionsof the insurer havebecome a commonrisk managementstandard in Brazil.AGCS risk engineerJonas rastelli, here at the constructionsite of a power plant,pays particular atten-tion to the lowest layer of earth and thefoundations consid-ering the special soilconditions in Brazil.

is establishing itself in the Brazilian construction busi-ness. “Just a few years ago, questions about soil samplesor technical construction data would have been unusu-al.” Nowadays, however, Brazilian construction compa-nies are more prepared to share information with bro-kers and insurers.

On-site inspections by Allianz’s risk engineers are alsofully established now. AGCS civil engineer Jonas Rastellidoesn’t balk at tough travel schedules and has just re-turned from the building site of a power plant in the northeast of Brazil. The only way of getting there was afour-hour journey along gravel tracks from the nearestregional airport in São Luís (Maranhão).

Challenging soil conditionsRastelli inspected the soil compaction, the concrete mixand the standard of the quality control for incoming ma-terials and construction progress. However, he is also in-terested in the training and working conditions of thebuilders. “Every building site is dependent on its em-ployees,” Rastelli stresses, “and that applies even more tothe major projects that are so common here.” The build-ing sites, which are often located in remote corners of thecountry, far from civilization, sometimes employ up to15,000 builders and technicians. So minimizing work-force-related challenges on a construction site can be animportant part of a risk management program to ensuremaximum productivity and effective maintenance ofplant and machinery.

Rastelli pays particular attention to the excavations andfoundation construction. Brazil faces almost no severethreat from natural disasters – there are no volcaniceruptions, typhoons or earthquakes – but torrential tropical rains can disrupt and delay building projects.Furthermore, sudden floods can cause Brazil’s highly ab-sorbent sandy soil to swell, or lead to landslides – bothwith lethal consequences for foundations.

AGCS EXPANDING IN BRAZILAllianz Global Corporate& Specialty (AGCS) hascontinued to expand itsglobal reach with theopening of its new localreinsurer in Brazil in Ja-nuary 2013. Allianz Glo-bal Corporate & Specialtyresseguros Brasil S.A.(AGCS Brazil) is head-quartered in rio deJaneiro with anotheroffice in São Paulo, and is the 13th local rein-surer to join the Brazilian market. Standard& Poor’s consider the new branch “strategi-cally important” for the AGCS Group andhave assigned AGCS Brazil the global ratingof “A -” and local rating of “AAA.”

Country manager is Angelo Colombo, whohas led AGCS business in the region since2009, two years after the Brazilian state-controlled monopoly came to an end andlegislation opened the market to foreignreinsurers. AGCS operated then only on anadmitted reinsurer’s license while develop-ing its strategy for South America within itsplans to grow in emerging markets. “re-ceiving our local reinsurer’s license in de-cember last year was a critical step for us,”says Colombo, “and allows us now to bemuch more active in the market. As a localreinsurer, we can offer more of our valuedservice to clients and further grow ourbusiness.”

Brazil already represents about 50 percentof AGCS’s market potential in South Americaand, under current plans, will be the futurehub of operations in this region. Gross writ-ten premiums from South American busi-ness are expected to reach more than €350 million in total by 2015. AGCS aims tostrengthen its client services in growth mar-kets. “The Brazilian reinsurance market isvery dynamic,” Colombo says. “As we striveto expand and continuously improve ourBrazilian business model, it is essential thatwe have local experts on the ground to better serve our clients, brokers and carriers.”

exOTIC VenueS

In 2014, Brazil willhost the World Cupand is spending morethan 12 billion eurosin preparation. 12stadiums are beingbuilt or renovated.Certainly the mostexotic of the sportingvenues is Arena daAmazônia for 42,500spectators, which isbuilt from scratch inManaus, in the middleof the tropical rainforest.

ery breakdown insurance, for instance as lead reinsurerfor one of the world’s largest energy generation plants.

New risk management cultureThose wanting to play a part in major projects need to re-act fast to requests for proposals despite the limitedavailability of information, says Andreas Hoelscher, incharge of underwriting AGCS Brazil’s engineering busi-ness. Local insurers as well as London-based reinsurerscompete for the attractive projects. Nevertheless, Hoel-scher notes that a new culture of risk management andtechnical underwriting based on technology know-how

Angelo Colombo, CeO AGCS Brazil.