Brazil’s latest plans for infrastructure investment

Brazil’s government recently announced a new list of planned infrastructure concessions to be auctioned off to private sector companies. Totaling nearly 200 billion Brazilian reais, the projects are the first since President Dilma Rousseff’s government launched the PAC II growth acceleration plan in 2012.

Meanwhile, the Brazilian state-owned oil producer, Petrobras, was expected to announce its own business plan for the period 2015 to 2019, but it now appears that the company will not release its new investment plans until July at the earliest. (The announcement was widely anticipated due to the recent turmoil created by the company’s corruption scandal and the fact that the company has accounted for nearly 10 percent of Brazil’s total investment over the past several years.)

It’s all in the details

Totaling nearly 200 billion Brazilian reais, Ms. Rousseff’s ambitious investment plan was the topic of substantial speculation and debate in Brazil over the past week. The major questions surrounding the plan relate to the likelihood of its success. Surprisingly, however, the plan has thus far been lauded by the opposition (PSDB), though with some reservations.

One of the largest concerns is that of the nearly 200 billion reais in concessions, 129 billion will not be auctioned off until after 2019 and will require further feasibility studies. Additionally, a portion of the recently announced concessions were also included in the 2012 plan but never came to fruition. Nonetheless, the government’s supporters and detractors alike have extoled the market-oriented structure of the plan, suggesting that certain rule adjustments could generate even greater private sector interest.

With respect to the now postponed Petrobras 2015-2019 business plan, while exact details are still unknown, the company’s president made it public in May that he expected cuts of up to US$20 billion to the company’s budgets. This would represent a significant reduction from an average yearly investment of US$44 billion in recent years, or nearly 10 percent of Brazil’s total investment. Beyond the first order negative effect on jobs, especially in the country’s oil producing states, Petrobras investment is a leading indicator of Brazil’s future oil production, thus suggesting that the country’s overall oil output could suffer in the near future.

Significance for Multinational Companies

  • Near-term economic growth in Brazil will depend on productivity gains, which hinge upon a much-needed increase in total investment. Indeed, it has been estimated that Brazil needs to invest up to 1 trillion reais in infrastructure projects to be competitive at the international level. In this regard, the government’s announcement at the beginning of this week is a step in the right direction. However, considering the many doubts that surround several of the projects, in addition to the government’s track record when it comes to port and railroad projects, a certain degree of caution should be exercised around the near-term business opportunities derived from these projects.
  • Interestingly, however, was the announcement made by the Brazilian planning minister that companies linked to the corruption scandal at Petrobras will not (for the time being) be banned from participating in the newly announced infrastructure concessions. There is also an ongoing push in Congress to ease restrictions regarding participation in public tenders by companies found guilty of corruption. Both developments suggest that the Brazilian construction sector may not be as negatively affected by the scandal as originally believed.
  • Despite the moderately positive boost provided by the government’s announced infrastructure tenders, the expected cut in Petrobras investment will significantly affect the purchasing power of the oil and gas sector in the near future. Such cuts will also exacerbate the negative effects of oil prices that are likely to fluctuate in the US$60-70 USD range over the next few years. Consumer demand in oil producing and refining states will be most negatively affected, with significant payroll reductions already having been witnessed. Companies selling to the oil and gas industry and companies selling consumer goods in important oil producing and refining states should plan accordingly.
  • An additional implication of reduced Petrobras investment is in respect to future oil production in Brazil. As Petrobras is required by law to participate in all pre-salt tenders, reduced investment by the company has real potential of negatively influencing the country’s total production in the near future. However, until the ongoing battle over a new law regarding the division of royalties between the states and the federal government is resolved (most likely through the Supreme Court), the exact implications of lower-than-anticipated oil production are difficult to assess. Nonetheless, the government’s 2013 law that dedicates 75 percent of oil royalties to education and the remaining 25 percent to health care would suggest that these two sectors stand to be most significantly affected by any fall in output.

FSG will continue to follow the evolution of the concession tenders announced by the Brazilian government. While plans for new and expanded highways, ports, railroads, and airports are surely welcome, the successful and timely execution of these proposed projects is anything but guaranteed. Furthermore, FSG will continue to stay abreast of the ongoing battle between Brazilian states and the federal government regarding the division of oil royalties and the application of the ICMS (value added tax). The eventual resolution of this battle will be key to understanding how future oil prices and production will affect government spending at all levels.

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This post was written by FSG LATAM Research Intern, Alec Lee.

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