Until the early 1980s Brazil and other nations in the region invested heavily in infrastructure. But after a series of financial crises, spending halved to as little as 2 per cent, as governments reined in debt levels. “Total infrastructure investment collapsed in the second half of the 1980s, and the fall has not been reversed in the ensuing two decades,” said a 2010 World Bank report.
Economists at Goldman Sachs estimate that if Latin America, led by Brazil, doubled its infrastructure investment to 4-6 per cent a year in 20 years, capacity would catch up with South Korea, an emerging-market success story. This would boost potential GDP growth from below 4 per cent to about 5.5 per cent. “This would reduce income inequality by 10-20 per cent,” they said in a report this year.
Mindful of the potential gains, Ms. Rousseff has begun pushing through the sale of infrastructure concessions to public-private consortiums. In February the government auctioned concessions for major airports in Sao Paulo, the country’s industrial and financial centre; the nearby satellite city of Campinas; and Brasilia. In mid-August it announced the sale of $64-billion of concessions for 10,000 kilometres of railways and 7,500 kilometres of toll roads. “It is really a positive thing for the country,” says Mr. Beker. “The risk is execution.”
Some of these projects are not new. The Growth Acceleration Programme (PAC), now in its second phase, envisaged at least two of the highways back in 2008. The government regularly boasts of the program’s achievements, recently saying that in 2011, the first year of PAC2, it completed 628 kilometres of road work, 11 airports, eight port ventures, nearly 3,000 megawatts of new power generation capacity and nearly 250,000 new power connections. But while the scheme is welcomed by investors, there is skepticism over its effectiveness – during the first phase, only slightly more than half of the envisaged investment for logistics and utilities was concluded. Red tape, problems with structuring projects and government inertia contributed to the delays.
Still, Ms. Rousseff’s announcement this month on roads and railways was taken as a positive sign that the government is moving from stimulating consumption to encouraging investment, which in Brazil is seen as too low at 19 per cent of GDP versus the estimated requirement of 22 per cent. Ms. Rousseff is expected to announce soon further sales of concessions for ports and airports in Rio, Belo Horizonte in the interior and in the booming northeast.
Foreign investors are on the alert. “We will follow very carefully everything the government is going to do in airports and ports,” says Patrice Etlin of private equity firm Advent in Brazil. “There is a lot of interest among many financial investors around those assets.”
To overcome reliance on Brazil’s development bank, practically the sole long-term financier in the country, the government has announced income tax breaks for the private sector and foreign investors on bonds for infrastructure projects. With European and U.S. banks less inclined to lend, governments in the region are having to become more innovative in the way they attract investors.
“The more diverse you can make the sources of capital, the more you can get done,” says Cherian George of Fitch Ratings in New York.
It remains too early to tell whether foreigners will be willing to take the long-term risk of investing in local-currency infrastructure bonds. But other changes in the economy could prove supportive. The central bank is expected this week to cut the benchmark interest rate to a low of 7.5 per cent in a move to revive the sluggish economy. If it can sustain lower rates, investors will begin looking at longer-term investments in search of higher returns.
“We had a country that was addicted to very high interest rates – suddenly that doesn’t exist any more,” says Marcelo Kayath of Credit Suisse.