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Analysis on Infrastructure Sector in Brazil

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Feb 17 2011

Research and Markets has announced the addition of the "Brazil Infrastructure Report Q1 2011" report to their offering.

The Brazil Infrastructure Report provides industry professionals and strategists, corporate analysts, infrastructure associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Brazil's infrastructure industry.

Brazils construction industry has long held substantial potential; nonetheless the oft-cited statement Brazil is the country of the future, and always will be is also true of its construction sector, where muchpromise has amounted to little progress. However, over the past 12 months, a number of factors havealigned which could make Brazils construction industry value among the fastest growing in the worldover the next five years. Positives for growth:

2014 FIFA World Cup: US$11.3bn has been pledged by federal governments, states andmunicipalities involved, to be invested in construction of stadia and transport;
2016 Olympics: US$14.4bn has been budgeted to prepare Rio de Janeiro to host the 2016 Olympics, with much of this expected to go towards infrastructure;
PAC II: BRL958.9bn (US$534bn) allocated to be invested in construction projects between 2011 and 2014, and a further BRL631.6bn (US$351.9bn) to be invested beyond 2014;
Election of Dilma Rousseff as Lulas successor: As the mother of the PAC and a leftist-leaning politician, Rousseff will likely continue to emphasise the investment in both social and economicinfrastructure trail-blazed by Lula; andReal GDP growth will hinge on the improvement of Brazil's infrastructure, improving access to transportand warding off potential electricity shortages. The need for infrastructure investment is substantial US$85bn of financing for infrastructure is estimated to be required by 2020, according to Banco doBrasil.

A period of Unprecedented Potential Combined, these factors are driving our robust construction industry value forecasts, which have beenlifted slightly over the nearer term (compared to last quarter) due to the election of Dilma Rousseff in October 2010. Between 2010 and 2015 annual average growth of 7.8% is forecast, with industry value togrow from BRL159 to BRL278 over the same time period.

The aligning of the political establishment with an economy which is once again reporting robust growth, set in the context of Brazils infrastructure soon taking centre stage, means Brazil is facing unprecedentedpotential. Construction companies and infrastructure financiers alike have been circling the sector,looking to secure a slice of the pie (SNC-Lavalin being a good example). However, the dominance oflocal construction companies in bidding for projects and the need for a local partner in most cases, meansopportunities could be limited for international construction companies.

Erosion of Growth On the face of it, our outlook for Brazil is optimistic and growth has the potential to be much higher basedon the factors listed above. However, cautious optimism is instead our outlook, with complexbureaucratic and regulatory hurdles stymieing investment, both public and private. Brazil has failed toconvert the governments good intentions into investment on the ground due primarily to theshortcomings of its business environment, which have left inexperienced international investors reliant onlocal partners to navigate the sector.

Negatives capping growth:

History of PAC I: BRL642 (US$353bn) (including later boosts) of investment was earmarkedfor 2007-2010; however, only BRL257bn was realised by the end of 2009;
Business Environment: There is a high level of bureaucracy and complex regulations Brazil scored only 61 out of 100 in BMI's Infrastructure Business Environment Ratings;
Politicisation of infrastructure projects means the government is pushing through large projects regardless of feasibility (e.g. Belo Monte hydropower project and high speed rail)
Shortage of local skilled labour; ?? High public debt levels: Public debt at around 50% of GDP could limit investment ability;
BNDES, a crucial financier of infrastructure, is lending at unsustainably high levels to support PAC projects. The bank is making a loss on its loans, meaning it could curtail loan opportunities;and
Difficulty in accessing finance commercial loans in Brazil are both expensive (due to high interest rates) and unfit for purpose, due to the inability of banks to provide loans beyond a 5-10year period. In addition, the difficulty and expense of getting money in and out of the countrymeans revenues are reduced and repaying loans is difficult.

Although hosting international sporting competitions should provide motivation to improve the business environment, in order to attract necessary investment in time for the events, presently the public sector isstill filling the gap vacated by the private sector and leading investment in the infrastructure subsectors(transport and energy and utilities). This is an unsustainable burden on the governments finances andtherefore, Brazil needs to address these issues in order to fully realise its potential.

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